UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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X
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
June 30,
2010
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
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Commission file
number: 1-7182
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
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Delaware
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13-2740599
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina
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28255
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(Address of principal executive offices)
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(Zip Code)
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(704) 386-5681
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Registrants telephone number, including area code:
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Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
X YES NO
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such files).
YES NO
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated filer
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Accelerated filer
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Non-accelerated
filer X
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Smaller reporting company
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
YES X NO
As of the close of business on August 6, 2010, there were
1,000 shares of Common Stock outstanding with a par value
of
$1.331/3
per share, all of which were held by Bank of America Corporation.
The registrant is a wholly owned subsidiary of Bank of
America Corporation and meets the conditions set forth in
General Instructions H(1)(a) and (b) of
Form 10-Q
and is therefore filing this Form with the reduced disclosure
format as permitted by Instruction H(2).
QUARTERLY
REPORT ON
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
TABLE OF CONTENTS
1
PART I
Financial Information
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Item 1.
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Financial
Statements (Unaudited)
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Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed
Consolidated Statements of Earnings/(Loss) (Unaudited)
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Three Months Ended
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Three Months Ended
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(dollars in millions)
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June 30, 2010
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June 30, 2009
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Revenues
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Principal transactions
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$
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2,100
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$
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(1,828
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)
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Commissions
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1,460
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1,626
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Managed accounts and other fee-based revenues
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1,161
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1,064
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Investment banking
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716
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862
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Earnings from equity method investments
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96
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54
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Other
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1,272
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1,091
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Other-than-temporary
impairment losses on
available-for-sale
debt securities:
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Total
other-than-temporary
impairment losses
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(39
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)
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(294
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)
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Less: Portion of
other-than-temporary
impairment losses recognized in other comprehensive income
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2
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-
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Subtotal
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6,768
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2,575
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Interest and dividend revenues
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1,002
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2,443
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Less interest expense
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2,053
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2,969
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Net interest expense
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(1,051
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)
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(526
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)
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Revenues, net of interest expense
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5,717
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2,049
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Non-interest expenses
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Compensation and benefits
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3,476
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3,411
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Communications and technology
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460
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498
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Occupancy and related depreciation
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318
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314
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Brokerage, clearing, and exchange fees
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262
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260
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Advertising and market development
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94
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55
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Professional fees
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177
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153
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Office supplies and postage
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34
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38
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Other
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671
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506
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Total non-interest expenses
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5,492
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5,235
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Pre-tax earnings/(loss)
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225
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(3,186
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)
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Income tax benefit
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(135
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)
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(1,145
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)
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Net earnings/(loss)
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$
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360
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$
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(2,041
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)
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Preferred stock dividends
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38
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38
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Net earnings/(loss) applicable to common stockholder
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$
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322
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$
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(2,079
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)
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See Notes to Condensed
Consolidated Financial Statements.
2
Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
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Six Months Ended
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Six Months Ended
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(dollars in millions)
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June 30, 2010
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June 30, 2009
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Revenues
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Principal transactions
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$
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5,318
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$
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4,086
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Commissions
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2,927
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3,006
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Managed accounts and other fee-based revenues
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2,212
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2,220
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Investment banking
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1,383
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1,468
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Earnings from equity method investments
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377
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94
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Other
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2,426
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1,362
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Other-than-temporary
impairment losses on
available-for-sale
debt securities:
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Total
other-than-temporary
impairment losses
|
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|
(125
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)
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(294
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)
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Less: Portion of
other-than-temporary
impairment losses recognized in other comprehensive income
|
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2
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-
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Subtotal
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14,520
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11,942
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Interest and dividend revenues
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2,817
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6,826
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Less interest expense
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4,093
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6,424
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Net interest (expense)/profit
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(1,276
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)
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402
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Revenues, net of interest expense
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13,244
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12,344
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Non-interest expenses
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|
|
|
|
|
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Compensation and benefits
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|
7,320
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6,689
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Communications and technology
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922
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897
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Occupancy and related depreciation
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623
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585
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Brokerage, clearing, and exchange fees
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542
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532
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Advertising and market development
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179
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161
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Professional fees
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321
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255
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Office supplies and postage
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77
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80
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Other
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1,102
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|
957
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|
|
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|
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|
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Total non-interest expenses
|
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|
11,086
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|
|
|
10,156
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|
|
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Pre-tax earnings
|
|
|
2,158
|
|
|
|
2,188
|
|
Income tax expense
|
|
|
529
|
|
|
|
479
|
|
|
|
|
|
|
|
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Net earnings
|
|
$
|
1,629
|
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|
$
|
1,709
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|
|
|
|
|
|
|
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Preferred stock dividends
|
|
|
76
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
Net earnings applicable to common stockholder
|
|
$
|
1,553
|
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|
$
|
1,656
|
|
|
|
|
|
|
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|
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See Notes to Condensed
Consolidated Financial Statements.
3
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(dollars in millions, except per share amounts)
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June 30, 2010
|
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December 31, 2009
|
|
ASSETS
|
|
|
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Cash and cash equivalents
|
|
$
|
15,778
|
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|
$
|
15,005
|
|
|
|
|
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Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
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11,542
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20,430
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|
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|
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Securities financing transactions
|
|
|
|
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|
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Receivables under resale agreements (includes $45,030 in 2010
and $41,740 in 2009 measured at fair value in accordance with
the fair value option election)
|
|
|
88,993
|
|
|
|
69,738
|
|
Receivables under securities borrowed transactions (includes
$1,349 in 2010 and $2,888 in 2009 measured at fair value in
accordance with the fair value option election)
|
|
|
51,455
|
|
|
|
45,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,448
|
|
|
|
115,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Trading assets, at fair value (includes securities pledged as
collateral that can be sold or repledged of $32,688 in 2010 and
$25,901 in 2009):
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
46,731
|
|
|
|
49,582
|
|
Equities and convertible debentures
|
|
|
30,569
|
|
|
|
34,501
|
|
Non-U.S.
governments and agencies
|
|
|
30,117
|
|
|
|
21,256
|
|
Corporate debt and preferred stock
|
|
|
16,721
|
|
|
|
16,779
|
|
Mortgages, mortgage-backed, and asset-backed
|
|
|
7,516
|
|
|
|
7,971
|
|
U.S. Government and agencies
|
|
|
3,264
|
|
|
|
1,458
|
|
Municipals, money markets, physical commodities and other
|
|
|
12,535
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|
|
|
8,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,453
|
|
|
|
140,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities (includes $281 in 2010 and $253 in 2009
measured at fair value in accordance with the fair value option
election)
|
|
|
24,195
|
|
|
|
32,840
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral, at fair value
|
|
|
20,952
|
|
|
|
16,346
|
|
|
|
|
|
|
|
|
|
|
Receivables from Bank of America
|
|
|
34,364
|
|
|
|
20,619
|
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
|
|
|
|
|
|
Customers (net of allowance for doubtful accounts of $9 in 2010
and $10 in 2009)
|
|
|
21,840
|
|
|
|
31,818
|
|
Brokers and dealers
|
|
|
5,356
|
|
|
|
5,998
|
|
Interest and other
|
|
|
9,651
|
|
|
|
14,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,847
|
|
|
|
52,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes, and mortgages (net of allowances for loan losses
of $54 in 2010 and $33 in 2009) (includes $3,438 in 2010 and
$4,649 in 2009 measured at fair value in accordance with the
fair value option election)
|
|
|
32,576
|
|
|
|
37,663
|
|
|
|
|
|
|
|
|
|
|
Equipment and facilities (net of accumulated depreciation and
amortization of $1,040 in 2010 and $726 in 2009)
|
|
|
1,847
|
|
|
|
2,324
|
|
|
|
|
|
|
|
|
|
|
Goodwill and other intangible assets
|
|
|
8,791
|
|
|
|
8,883
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
17,638
|
|
|
|
17,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
492,431
|
|
|
$
|
479,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of Consolidated VIEs Included in Total Assets Above
(pledged as collateral)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts
|
|
$
|
9,282
|
|
|
|
|
|
Derivative contracts
|
|
|
153
|
|
|
|
|
|
Investment securities
|
|
|
1,742
|
|
|
|
|
|
Loans, notes, and mortgages (net)
|
|
|
2,056
|
|
|
|
|
|
Other assets
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets of Consolidated VIEs
|
|
$
|
15,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
Merrill
Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
|
|
|
|
|
|
|
|
|
(dollars in millions, except per share amounts)
|
|
June 30, 2010
|
|
December 31, 2009
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities financing transactions
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements (includes $42,614 in 2010
and $37,325 in 2009 measured at fair value in accordance with
the fair value option election)
|
|
$
|
83,134
|
|
|
$
|
66,260
|
|
Payables under securities loaned transactions
|
|
|
13,474
|
|
|
|
24,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,608
|
|
|
|
91,175
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (includes $6,752 in 2010 and $813 in 2009
measured at fair value in accordance with the fair value option
election)
|
|
|
6,801
|
|
|
|
853
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
12,961
|
|
|
|
15,187
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, at fair value
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
37,879
|
|
|
|
35,120
|
|
Equities and convertible debentures
|
|
|
19,336
|
|
|
|
13,654
|
|
Non-U.S.
governments and agencies
|
|
|
21,758
|
|
|
|
12,844
|
|
Corporate debt and preferred stock
|
|
|
3,261
|
|
|
|
1,903
|
|
U.S. Government and agencies
|
|
|
2,220
|
|
|
|
1,296
|
|
Municipals, money markets and other
|
|
|
532
|
|
|
|
643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,986
|
|
|
|
65,460
|
|
|
|
|
|
|
|
|
|
|
Obligation to return securities received as collateral, at fair
value
|
|
|
20,952
|
|
|
|
16,346
|
|
Payables to Bank of America
|
|
|
25,584
|
|
|
|
23,550
|
|
|
|
|
|
|
|
|
|
|
Other payables
|
|
|
|
|
|
|
|
|
Customers
|
|
|
34,303
|
|
|
|
39,307
|
|
Brokers and dealers
|
|
|
11,915
|
|
|
|
14,148
|
|
Interest and other (includes $184 in 2010 and $240 in 2009
measured at fair value in accordance with the fair value option
election)
|
|
|
19,279
|
|
|
|
17,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,497
|
|
|
|
70,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings (includes $39,588 in 2010 and $47,040 in
2009 measured at fair value in accordance with the fair value
option election)
|
|
|
131,734
|
|
|
|
151,399
|
|
Junior subordinated notes (related to trust preferred securities)
|
|
|
3,563
|
|
|
|
3,552
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
448,686
|
|
|
|
438,057
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stockholders Equity; authorized
25,000,000 shares; (liquidation preference of $100,000 per
share; issued: 17,000 shares)
|
|
|
1,541
|
|
|
|
1,541
|
|
Common Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock (par value
$1.331/3
per share; authorized: 3,000,000,000 shares; issued:
1,000 shares)
|
|
|
-
|
|
|
|
-
|
|
Paid-in capital
|
|
|
36,489
|
|
|
|
35,126
|
|
Accumulated other comprehensive (loss) (net of tax)
|
|
|
(276
|
)
|
|
|
(112
|
)
|
Retained earnings
|
|
|
5,991
|
|
|
|
4,583
|
|
|
|
|
|
|
|
|
|
|
Total Common Stockholders Equity
|
|
|
42,204
|
|
|
|
39,597
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
43,745
|
|
|
|
41,138
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
492,431
|
|
|
$
|
479,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of Consolidated VIEs Included in Total
Liabilities Above
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
4,621
|
|
|
|
|
|
Derivative contracts
|
|
|
10
|
|
|
|
|
|
Other liabilities
|
|
|
966
|
|
|
|
|
|
Long-term borrowings
|
|
|
6,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities of Consolidated VIEs
|
|
$
|
12,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed
Consolidated Financial Statements.
5
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Six Months Ended
|
(dollars in millions)
|
|
June 30, 2010
|
|
June 30, 2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1,629
|
|
|
$
|
1,709
|
|
Adjustments to reconcile net earnings to cash (used for)
provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
468
|
|
|
|
608
|
|
Share-based compensation expense
|
|
|
830
|
|
|
|
455
|
|
Deferred taxes
|
|
|
507
|
|
|
|
319
|
|
Earnings from equity method investments
|
|
|
(214
|
)
|
|
|
(94
|
)
|
Other
|
|
|
884
|
|
|
|
(585
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
(3,324
|
)
|
|
|
26,327
|
|
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations
|
|
|
3,363
|
|
|
|
3,728
|
|
Receivables from Bank of America
|
|
|
(13,745
|
)
|
|
|
(3,015
|
)
|
Receivables under resale agreements
|
|
|
(19,255
|
)
|
|
|
32,397
|
|
Receivables under securities borrowed transactions
|
|
|
(6,033
|
)
|
|
|
(6,757
|
)
|
Customer receivables
|
|
|
9,980
|
|
|
|
7,415
|
|
Brokers and dealers receivables
|
|
|
645
|
|
|
|
7,577
|
|
Proceeds from loans, notes, and mortgages held for sale
|
|
|
3,571
|
|
|
|
5,696
|
|
Other changes in loans, notes, and mortgages held for sale
|
|
|
(1,323
|
)
|
|
|
(4,502
|
)
|
Trading liabilities
|
|
|
19,840
|
|
|
|
(23,331
|
)
|
Payables under repurchase agreements
|
|
|
16,874
|
|
|
|
(23,406
|
)
|
Payables under securities loaned transactions
|
|
|
(11,441
|
)
|
|
|
(4,361
|
)
|
Payables to Bank of America
|
|
|
2,034
|
|
|
|
31,756
|
|
Customer payables
|
|
|
(5,004
|
)
|
|
|
(5,112
|
)
|
Brokers and dealers payables
|
|
|
(2,233
|
)
|
|
|
(3,106
|
)
|
Other, net
|
|
|
50
|
|
|
|
4,719
|
|
|
|
|
|
|
|
|
|
|
Cash (used for) provided by operating activities
|
|
|
(1,897
|
)
|
|
|
48,437
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
Maturities of
available-for-sale
securities
|
|
|
854
|
|
|
|
4,311
|
|
Sales of
available-for-sale
securities
|
|
|
14,827
|
|
|
|
5,844
|
|
Purchases of
available-for-sale
securities
|
|
|
(508
|
)
|
|
|
(555
|
)
|
Equipment and facilities, net
|
|
|
(161
|
)
|
|
|
(118
|
)
|
Loans, notes, and mortgages held for investment
|
|
|
1,394
|
|
|
|
3,271
|
|
Other investments
|
|
|
1,406
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
17,812
|
|
|
|
13,662
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (payments for):
|
|
|
|
|
|
|
|
|
Commercial paper and short-term borrowings
|
|
|
935
|
|
|
|
(35,961
|
)
|
Issuance and resale of long-term borrowings
|
|
|
4,548
|
|
|
|
6,132
|
|
Settlement and repurchases of long-term borrowings
|
|
|
(18,323
|
)
|
|
|
(34,539
|
)
|
Capital contributions from Bank of America
|
|
|
-
|
|
|
|
6,850
|
|
Deposits
|
|
|
(2,226
|
)
|
|
|
3,620
|
|
Dividends
|
|
|
(76
|
)
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
Cash used for financing activities
|
|
|
(15,142
|
)
|
|
|
(53,951
|
)
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
773
|
|
|
|
8,148
|
|
Cash and cash equivalents, beginning of period
|
|
|
15,005
|
|
|
|
52,603
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
15,778
|
|
|
$
|
60,751
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Income taxes paid (net of refunds)
|
|
$
|
6
|
|
|
$
|
126
|
|
Interest paid
|
|
|
3,353
|
|
|
|
7,342
|
|
Non-cash investing and financing activities:
For the six months ended June 30, 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 six months ended June 30, 2009, which
were recorded as non-cash capital contributions.
See Notes to Condensed
Consolidated Financial Statements.
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Three Months Ended
|
|
Six Months Ended
|
(dollars in millions)
|
|
June 30, 2010
|
|
June 30, 2010
|
|
June 30, 2009
|
|
June 30, 2009
|
|
Net earnings/(loss)
|
|
$
|
360
|
|
|
$
|
1,629
|
|
|
$
|
(2,041
|
)
|
|
$
|
1,709
|
|
Other comprehensive income/(loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
1
|
|
|
|
(58
|
)
|
|
|
(348
|
)
|
|
|
(119
|
)
|
Net unrealized gain/(loss) on investment securities
available-for-sale
|
|
|
41
|
|
|
|
(117
|
)
|
|
|
428
|
|
|
|
534
|
|
Net deferred gain/(loss) on cash flow hedges
|
|
|
(9
|
)
|
|
|
8
|
|
|
|
(33
|
)
|
|
|
6
|
|
Defined benefit pension and postretirement plans
|
|
|
2
|
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income/(loss), net of tax
|
|
|
35
|
|
|
|
(164
|
)
|
|
|
45
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss)
|
|
$
|
395
|
|
|
$
|
1,465
|
|
|
$
|
(1,996
|
)
|
|
$
|
2,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed
Consolidated Financial Statements.
7
June 30, 2010
Description
of Business
Merrill Lynch & Co. Inc.
(ML & Co.) and together with its
subsidiaries (Merrill Lynch), provide trading,
investment, financing and related services to individuals and
institutions on a global basis through its broker, dealer,
banking and other financial services subsidiaries.
Bank of
America Acquisition
On January 1, 2009, Merrill Lynch was acquired by Bank of
America Corporation (Bank of America or
BAC) through the merger of a wholly-owned subsidiary
of Bank of America with and into ML & Co., with
ML & Co. continuing as the surviving corporation and a
wholly-owned subsidiary of Bank of America. Upon completion of
the acquisition, each outstanding share of ML & Co.
common stock was converted into 0.8595 shares of Bank of
America common stock. As of the completion of the acquisition,
ML & Co. Series 1 through Series 8 preferred
stock were converted into Bank of America preferred stock with
substantially identical terms to the corresponding series of
Merrill Lynch preferred stock (except for additional voting
rights provided to the Bank of America securities). The
Merrill Lynch 9.00% Non-Voting Mandatory Convertible
Non-Cumulative Preferred Stock, Series 2, and 9.00%
Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock,
Series 3, that were outstanding immediately prior to the
completion of the acquisition remained issued and outstanding
subsequent to the acquisition, but are now convertible into Bank
of America common stock.
Basis of
Presentation
The Condensed Consolidated Financial Statements include the
accounts of Merrill Lynch. The Condensed Consolidated Financial
Statements are presented in accordance with U.S. Generally
Accepted Accounting Principles (U.S. GAAP).
Intercompany transactions and balances within Merrill Lynch have
been eliminated. Transactions and balances with Bank of America
have not been eliminated. The interim Condensed Consolidated
Financial Statements are unaudited; however, all adjustments for
a fair presentation of the Condensed Consolidated Financial
Statements have been included.
These unaudited Condensed Consolidated Financial Statements
should be read in conjunction with the audited Consolidated
Financial Statements included in Merrill Lynchs Annual
Report on
Form 10-K
for the year ended December 31, 2009 (the 2009 Annual
Report). The nature of Merrill Lynchs business is
such that the results of any interim period are not necessarily
indicative of results for a full year. Certain prior-period
amounts have been reclassified to conform to the current period
presentation.
As disclosed in Note 22 to the Consolidated Financial
Statements contained in the 2009 Annual Report, Merrill Lynch
adjusted previously reported 2009 quarterly amounts related to
the valuation of certain long-term borrowings, primarily
structured notes. Merrill Lynch also recorded revisions to
certain purchase accounting adjustments made in connection with
the acquisition of Merrill Lynch by Bank of America. In
addition, Merrill Lynchs previously reported quarterly
results for 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 above adjustments increased the net loss
for the three
8
months ended June 30, 2009 by $221 million and
decreased net earnings for the six months ended June 30,
2009 by $131 million.
Consolidation
Accounting
Merrill Lynch determines whether it is required to consolidate
an entity by first evaluating whether the entity qualifies as a
voting rights entity (VRE), a variable interest
entity (VIE), or (prior to January 1,
2010) a qualified special purpose entity (QSPE).
The Condensed Consolidated Financial Statements include the
accounts of Merrill Lynch, whose subsidiaries are generally
controlled through a majority voting interest or a controlling
financial interest. In periods prior to January 1, 2010, in
certain cases, Merrill Lynch VIEs may have been consolidated
based on a risks and rewards approach. Additionally, prior to
January 1, 2010, Merrill Lynch did not consolidate
those special purpose entities that met the criteria of a QSPE.
See the New Accounting Pronouncements section of
this note for information regarding new VIE accounting guidance
that became effective on January 1, 2010.
VREs VREs are defined to include entities that have
both equity at risk that is sufficient to fund future operations
and have equity investors that have a controlling financial
interest in the entity through their equity investments. In
accordance with Accounting Standards Codification
(ASC) 810, Consolidation,
(Consolidation Accounting), Merrill Lynch
generally consolidates those VREs where it has the majority of
the voting rights. For investments in limited partnerships and
certain limited liability corporations that Merrill Lynch does
not control, Merrill Lynch applies ASC 323,
Investments Equity Method and Joint Ventures
(Equity Method Accounting), which requires use
of the equity method of accounting for investors that have more
than a minor influence, which is typically defined as an
investment of greater than 3% to 5% of the outstanding equity in
the entity. For more traditional corporate structures, in
accordance with Equity Method Accounting, Merrill Lynch applies
the equity method of accounting where it has significant
influence over the investee. Significant influence can be
evidenced by a significant ownership interest (which is
generally defined as a voting interest of 20% to 50%),
significant board of director representation, or other contracts
and arrangements.
VIEs Those entities that do not meet the VRE
criteria are generally analyzed for consolidation as either VIEs
or (prior to January 1, 2010) QSPEs. A VIE is an
entity that lacks equity investors or whose equity investors do
not have a controlling financial interest in the entity through
their equity investments. Merrill Lynch consolidates those VIEs
for which it is the primary beneficiary. In accordance with new
accounting guidance effective January 1, 2010, Merrill
Lynch is considered the primary beneficiary when it has a
controlling financial interest in a VIE. Merrill Lynch has a
controlling financial interest when it has both the power to
direct the activities of the VIE that most significantly impact
the VIEs economic performance and an obligation to absorb
losses or the right to receive benefits that could potentially
be significant to the VIE. Prior to January 1, 2010, the
primary beneficiary was the entity that would absorb a majority
of the economic risks and rewards of the VIE, based on an
analysis of probability-weighted cash flows. Merrill Lynch
reassesses whether it is the primary beneficiary of a VIE on a
quarterly basis. The quarterly reassessment process considers
whether Merrill Lynch has acquired or divested the power to
direct the activities of the VIE through changes in governing
documents or other circumstances. The reassessment also
considers whether Merrill Lynch has acquired or disposed of a
financial interest that could be significant to the VIE, or
whether an interest in the VIE has become significant or is no
longer significant. The consolidation status of the VIEs with
which Merrill Lynch is involved may change as a result of such
reassessments.
QSPEs Before January 1, 2010, QSPEs were
passive entities with significantly limited permitted
activities. QSPEs were generally used as securitization vehicles
and were limited in the type of assets that they may hold, the
derivatives into which they can enter and the level of
discretion that they may
9
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.
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.
Earnings from equity method investments include Merrill
Lynchs pro rata share of income and losses associated with
investments accounted for under the equity method.
Other revenues include gains/(losses) on investment securities,
including sales and
other-than-temporary-impairment
losses associated with certain
available-for-sale
securities, gains/(losses) on private equity investments and
other principal investments and gains/(losses) on loans and
other miscellaneous items.
Contractual interest and dividends received and paid on trading
assets and trading liabilities, excluding derivatives, are
recognized on an accrual basis as a component of interest and
dividend revenues and interest expense. Interest and dividends
on investment securities are recognized on an accrual basis as a
component of interest and dividend revenues. Interest related to
loans, notes, and mortgages, securities financing activities and
certain short- and long-term borrowings are recorded on an
accrual basis with related interest recorded as interest revenue
or interest expense, as applicable. Contractual interest, if
any, on structured notes is recorded as a component of interest
expense.
10
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 realization of deferred taxes and the recognition and
measurement of uncertain tax positions;
|
|
|
The carrying amount of goodwill and intangible assets;
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The amortization period of intangible assets with definite lives;
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Incentive-based compensation accruals and valuation of
share-based payment compensation arrangements; and
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Other matters that affect the reported amounts and disclosure of
contingencies in the financial statements.
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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 fair value under various accounting
literature, including ASC 320, Investments
Debt and Equity Securities, (Investment
Accounting), ASC 815, Derivatives and Hedging,
(Derivatives Accounting), and the fair value option
election in accordance with
ASC 825-10-25,
Financial Instruments Recognition, (the
fair value option election). Merrill Lynch also
accounts for certain assets at fair value under applicable
industry guidance, namely ASC 940 Financial
Services Brokers and Dealers
(Broker-Dealer Guide) and ASC 946,
Financial Services Investment Companies
(Investment Company Guide).
ASC 820, Fair Value Measurements and Disclosures,
(Fair Value Accounting) defines fair value,
establishes a framework for measuring fair value, establishes a
fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair
value measurements.
Fair values for
over-the-counter
(OTC) derivative financial instruments, principally
forwards, options, and swaps, represent the present value of
amounts estimated to be received from or paid to a marketplace
participant in settlement of these instruments (i.e., the amount
Merrill Lynch would expect to receive in a derivative asset
assignment or would expect to pay to have a derivative liability
assumed). These derivatives are valued using pricing models
based on the net present value of estimated future cash flows
and directly observed prices from exchange-traded derivatives,
other OTC trades, or external pricing services, while taking
into account the counterpartys creditworthiness, or
Merrill Lynchs own creditworthiness, as appropriate.
Determining the fair value for OTC derivative contracts can
require a significant level of estimation and management
judgment.
11
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.
Counterparty
Credit Risk
In determining fair value, Merrill Lynch considers both the
credit risk of its counterparties, as well as its own
creditworthiness. Merrill Lynch attempts to mitigate credit risk
to third parties by entering into netting and collateral
arrangements. Net counterparty exposure (counterparty positions
netted by offsetting transactions and both cash and securities
collateral) is then valued for counterparty creditworthiness and
this resultant value is incorporated into the fair value of the
respective instruments. Merrill Lynch generally calculates the
credit risk adjustment for derivatives based on observable
market credit spreads.
Fair Value Accounting also requires that Merrill Lynch consider
its own creditworthiness when determining the fair value of
certain instruments, including OTC derivative instruments and
certain structured notes carried at fair value under the fair
value option election. The approach to measuring the impact of
Merrill Lynchs credit risk on an instrument is done in the
same manner as for third party credit risk. The impact of
Merrill Lynchs credit risk is incorporated into the fair
value, even when credit risk is not readily observable, of
instruments such as OTC derivative contracts. OTC derivative
liabilities are valued based on the net counterparty exposure as
described above.
Legal
Reserves
Merrill Lynch is a party in various actions, some of which
involve claims for substantial amounts. Amounts are accrued for
the financial resolution of claims that have either been
asserted or are deemed probable of assertion if, in the opinion
of management, it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
In many cases, it is not possible
12
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 any outside counsel
handling the matter. Refer to Note 14 for further
information.
Income
Taxes
Merrill Lynch provides for income taxes on all transactions that
have been recognized in the Condensed Consolidated Financial
Statements in accordance with ASC 740, Income Taxes
(Income Tax Accounting). Accordingly, deferred
taxes are adjusted to reflect the tax rates at which future
taxable amounts will likely be settled or realized. The effects
of tax rate changes on deferred tax liabilities and deferred tax
assets, as well as other changes in income tax laws, are
recognized in net earnings in the period during which such
changes are enacted. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts that are
more-likely-than-not to be realized. Pursuant to Income Tax
Accounting, Merrill Lynch may consider various sources of
evidence in assessing the necessity of valuation allowances to
reduce deferred tax assets to amounts more-likely-than-not to be
realized, including the following: 1) past and projected
earnings, including losses, of Merrill Lynch and Bank of
America, as certain tax attributes such as U.S. net
operating losses (NOLs), U.S. capital loss
carryforwards and foreign tax credit carryforwards can be
utilized by Bank of America in certain income tax returns,
2) tax carryforward periods, and 3) tax planning
strategies and other factors of the legal entities, such as the
intercompany tax-allocation policy. Included within Merrill
Lynchs net deferred tax assets are carryforward amounts
generated in the U.S. and the U.K. that are deductible in
the future as NOLs. Merrill Lynch has concluded that these
deferred tax assets are more-likely-than-not to be fully
utilized prior to expiration, based on the projected level of
future taxable income of Merrill Lynch and Bank of America,
which is relevant due to the intercompany tax-allocation policy.
For this purpose, future taxable income was projected based on
forecasts, historical earnings after adjusting for the past
market disruptions and the anticipated impact of the differences
between pre-tax earnings and taxable income.
Merrill Lynch recognizes and measures its unrecognized tax
benefits in accordance with Income Tax Accounting. Merrill Lynch
estimates the likelihood, based on their technical merits, that
tax positions will be sustained upon examination considering the
facts and circumstances and information available at the end of
each period. Merrill Lynch adjusts the level of unrecognized tax
benefits when there is more information available, or when an
event occurs requiring a change. In accordance with Bank of
Americas policy, any new or subsequent change in an
unrecognized tax benefit related to a Bank of America state
consolidated, combined or unitary return in which Merrill Lynch
is a member will not be reflected in Merrill Lynchs
balance sheet. However, upon Bank of Americas resolution
of the item, any material impact determined to be attributable
to Merrill Lynch will be reflected in Merrill Lynchs
balance sheet. Merrill Lynch accrues income-tax-related interest
and penalties, if applicable, within income tax expense.
Beginning with the 2009 tax year, Merrill Lynchs results
of operations are included in the U.S. federal income tax
return and certain state income tax returns of Bank of America.
The method of allocating income tax expense is determined under
the intercompany tax allocation policy of Bank of America. This
policy specifies that income tax expense will be computed for
all Bank of America subsidiaries generally on a separate pro
forma return basis, taking into account the tax position of the
consolidated group and the pro forma Merrill Lynch group. Under
this policy, tax benefits associated with net operating losses
(or other tax attributes) of Merrill Lynch are payable to
Merrill Lynch upon the earlier of the utilization in Bank of
Americas tax returns or the utilization in Merrill
Lynchs pro forma tax returns.
13
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.
Merrill Lynchs policy is to obtain possession of
collateral with a market value equal to or in excess of the
principal amount loaned under resale agreements. To ensure that
the market value of the underlying collateral remains
sufficient, collateral is generally valued daily and Merrill
Lynch may require counterparties to deposit additional
collateral or may return collateral pledged when appropriate.
Substantially all repurchase and resale activities are
transacted under master repurchase agreements that give Merrill
Lynch the right, in the event of default, to liquidate
collateral held and to offset receivables and payables with the
same counterparty. Merrill Lynch offsets certain repurchase and
resale agreement balances with the same counterparty on the
Condensed Consolidated Balance Sheets.
Merrill Lynch may use securities received as collateral for
resale agreements to satisfy regulatory requirements such as
Rule 15c3-3
of the Securities Exchange Act of 1934.
Securities borrowed and loaned transactions may be recorded at
the amount of cash collateral advanced or received plus accrued
interest or at fair value under the fair value option election.
Securities borrowed transactions require Merrill Lynch to
provide the counterparty with collateral in the form of cash,
letters of credit, or other securities. Merrill Lynch receives
collateral in the form of cash or other securities for
securities loaned transactions. For these transactions, the fees
received or paid by Merrill Lynch are recorded as interest
revenue or expense. On a daily basis, Merrill Lynch monitors the
market value of securities borrowed or loaned against the
collateral value, and Merrill Lynch may require counterparties
to deposit additional collateral or may return collateral
pledged, when appropriate. The carrying value of these
instruments approximates fair value as these items are not
materially sensitive to shifts in market interest rates because
of their short-term nature
and/or
variable interest rates or to credit risk because securities
borrowed and loaned transactions are fully collateralized.
14
All Merrill Lynch-owned securities pledged to counterparties
where the counterparty has the right, by contract or custom, to
sell or repledge the securities are disclosed parenthetically in
trading assets or, if applicable, in investment securities on
the Condensed Consolidated Balance Sheets.
In transactions where Merrill Lynch acts as the lender in a
securities lending agreement and receives securities that can be
pledged or sold as collateral, it recognizes an asset on the
Condensed Consolidated Balance Sheets carried at fair value,
representing the securities received (securities received as
collateral), and a liability for the same amount, representing
the obligation to return those securities (obligation to return
securities received as collateral). The amounts on the Condensed
Consolidated Balance Sheets result from such non-cash
transactions.
Trading
Assets and Liabilities
Merrill Lynchs trading activities consist primarily of
securities brokerage and trading; derivatives dealing and
brokerage; commodities trading and futures brokerage; and
securities financing transactions. Trading assets and trading
liabilities consist of cash instruments (e.g., securities and
loans) and derivative instruments. Trading assets also include
commodities inventory. See Note 6 for additional
information on derivative instruments.
Trading assets and liabilities are generally recorded on a trade
date basis at fair value. Included in trading liabilities are
securities that Merrill Lynch has sold but did not own and will
therefore be obligated to purchase at a future date (short
sales). Commodities inventory is recorded at the lower of
cost or market value. Changes in fair value of trading assets
and liabilities (i.e., unrealized gains and losses) are
recognized as principal transactions revenues in the current
period. Realized gains and losses and any related interest
amounts are included in principal transactions revenues and
interest revenues and expenses, depending on the nature of the
instrument.
Investment
Securities
Investment securities consist of marketable investment
securities and non-qualifying investments. Refer to Note 8.
Marketable
Investment Securities
ML & Co. and certain of its non-broker-dealer
subsidiaries follow the guidance within Investment Accounting
for investments in debt and publicly traded equity securities.
Merrill Lynch classifies those debt securities that it does not
intend to sell as
held-to-maturity
securities.
Held-to-maturity
securities are carried at cost unless a decline in value is
deemed
other-than-temporary,
in which case the carrying value is reduced. For Merrill Lynch,
the trading classification under Investment Accounting generally
includes those securities that are bought and held principally
for the purpose of selling them in the near term, securities
that are economically hedged, or securities that may contain a
bifurcatable embedded derivative as defined in Derivatives
Accounting. Securities classified as trading are marked to fair
value through earnings. All other qualifying securities are
classified as
available-for-sale
and held at fair value with unrealized gains and losses reported
in accumulated other comprehensive income/(loss)
(OCI).
Realized gains and losses on investment securities are included
in current period earnings. For purposes of computing realized
gains and losses, the cost basis of each investment sold is
based on the specific identification method.
Merrill Lynch regularly (at least quarterly) evaluates each
held-to-maturity
and
available-for-sale
security whose value has declined below amortized cost to assess
whether the decline in fair value is
other-than-temporary.
A decline in a debt securitys fair value is considered to
be
other-than-temporary
if
15
it is probable that all amounts contractually due will not be
collected or Merrill Lynch either plans to sell the security or
it is more likely than not that it will be required to sell the
security before recovery of its amortized cost. For unrealized
losses on debt securities that are deemed
other-than-temporary,
the credit component of an
other-than-temporary
impairment is recognized in earnings and the noncredit component
is recognized in OCI when Merrill Lynch does not intend to sell
the security and it is more likely than not that Merrill Lynch
will not be required to sell the security prior to recovery.
Merrill Lynchs impairment review generally includes:
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Identifying securities with indicators of possible impairment;
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Analyzing individual securities with fair value less than
amortized cost for specific factors including:
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The estimated length of time to recover from fair value to
amortized cost;
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The severity and duration of the fair value decline from
amortized cost;
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Deterioration in the financial condition of the issuer;
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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
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Documenting the analysis and conclusions.
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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 a consolidated real estate fund are also
accounted for under the Investment Company Guide and carried at
fair value. Additionally, certain private equity investments
that are not accounted for under the Investment Company Guide
may be carried at fair value under the fair value option
election. The carrying value of private equity investments
reflects expected exit values based upon market prices or other
valuation methodologies including market comparables of similar
companies and expected cash flows.
Merrill Lynch has non-controlling investments in the common
shares of corporations and in partnerships that do not fall
within the scope of Investment Accounting or the Investment
Company Guide. Merrill Lynch accounts for these investments
using either the cost or the equity method of accounting based
on managements ability to influence the investees. See the
Consolidation Accounting Policies section of this Note for more
information.
For investments accounted for using the equity method, income is
recognized based on Merrill Lynchs share of the earnings
or losses of the investee. Dividend distributions are generally
recorded as reductions in the investment balance. Impairment
testing is based on the guidance provided in Equity Method
Accounting, and the investment is reduced when an impairment is
deemed
other-than-temporary.
16
For investments accounted for at cost, income is recognized as
dividends are received. Impairment testing is based on the
guidance provided in Investment Accounting, and the cost basis
is reduced when an impairment is deemed
other-than-temporary.
Loans,
Notes and Mortgages, Net
Merrill Lynchs lending and related activities include loan
originations, syndications and securitizations. Loan
originations include corporate and institutional loans,
residential and commercial mortgages, asset-based loans, and
other loans to individuals and businesses. Merrill Lynch also
engages in secondary market loan trading (see the Trading Assets
and Liabilities section within this Note) and margin lending.
Loans included in loans, notes, and mortgages are classified for
accounting purposes as loans held for investment and loans held
for sale. Upon completion of the acquisition of
Merrill Lynch by Bank of America, certain loans carried by
Merrill Lynch were subject to the requirements of
ASC 310-30,
Loans and Debt Securities Acquired with Deteriorated Credit
Quality (Acquired Impaired Loan Accounting).
Loans held for investment are generally carried at amortized
cost, less an allowance for loan losses, which represents
Merrill Lynchs estimate of probable losses inherent in its
lending activities. The fair value option election has been made
for certain
held-for-investment
loans, notes and mortgages. 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, consider
a variety of factors including, but not limited to, historical
loss experience, estimated defaults, delinquencies, economic
conditions, credit scores and the fair value of any underlying
collateral. Provisions for loan losses are included in interest
and dividend revenue in the Condensed Consolidated Statements of
Earnings/(Loss).
Merrill Lynchs estimate of loan losses includes judgment
about collectability based on available information at the
balance sheet date, and the uncertainties inherent in those
underlying assumptions. While management has based its estimates
on the best information available, future adjustments to the
allowance for loan losses may be necessary as a result of
changes in the economic environment or variances between actual
results and the original assumptions.
In general, loans that are past due 90 days or more as to
principal or interest, or where reasonable doubt exists as to
timely collection, including loans that are individually
identified as being impaired, are classified as impaired unless
well-secured and in the process of collection. Commercial loans
whose contractual terms have been restructured in a manner which
grants a concession to a borrower experiencing financial
difficulties are considered troubled debt restructurings and are
classified as impaired until the loans have performed for an
adequate period of time under the restructured agreement.
Interest accrued but not collected is reversed when a commercial
loan is classified as impaired. Interest collections on
commercial loans for which the ultimate collectability of
principal is uncertain are applied as principal reductions;
otherwise, such collections are credited to income when
received. Commercial loans may be restored to non-impaired
status when all principal and interest is current and full
repayment of the remaining contractual principal and interest is
expected, or when the loan otherwise becomes well-secured and is
in the process of collection.
Loans held for sale are carried at lower of cost or fair value.
The fair value option election has been made for certain held
for sale loans, notes and mortgages. Estimation is required in
determining these fair values. The fair value of loans made in
connection with commercial lending activity, consisting mainly
of senior debt, is primarily estimated using the market value of
publicly issued debt instruments when available or discounted
cash flows. Merrill Lynchs estimate of fair value for
other loans, notes, and mortgages is determined based on the
individual loan characteristics. For certain homogeneous
categories of loans, including residential mortgages and home
equity loans, fair value is estimated using a whole loan
valuation or an as-if securitized price based on
market conditions. An as-if securitized price is
17
based on estimated performance of the underlying asset pool
collateral, rating agency credit structure assumptions and
market pricing for similar securitizations previously executed.
Declines in the carrying value of loans held for sale and loans
accounted for at fair value under the fair value option election
are included in other revenues in the Condensed Consolidated
Statements of Earnings/(Loss).
Nonrefundable loan origination fees, loan commitment fees, and
draw down fees received in conjunction with held for
investment loans are generally deferred and recognized over the
contractual life of the loan as an adjustment to the yield. If,
at the outset, or any time during the term of the loan, it
becomes probable that the repayment period will be extended, the
amortization is recalculated using the expected remaining life
of the loan. When the loan contract does not provide for a
specific maturity date, managements best estimate of the
repayment period is used. At repayment of the loan, any
unrecognized deferred fee is immediately recognized in earnings.
If the loan is accounted for as held for sale, the fees received
are deferred and recognized as part of the gain or loss on sale
in other revenues. If the loan is accounted for under the fair
value option election, the fees are included in the
determination of the fair value and included in other revenues.
New
Accounting Pronouncements
In March 2010, the Financial Accounting Standards Board
(FASB) issued new accounting guidance on embedded
credit derivatives. This new accounting guidance clarifies the
scope exception for embedded credit derivatives and defines
which embedded credit derivatives are required to be evaluated
for bifurcation and separate accounting. This new accounting
guidance is effective on July 1, 2010. The adoption of this
new accounting guidance is not expected to have a material
impact on Merrill Lynchs financial position or results of
operations.
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. Beginning January 1, 2011, separate
presentation of purchases, sales, issuances and settlements in
the Level 3 reconciliation will also be required under the
amendments to Fair Value Accounting.
On January 1, 2010, Merrill Lynch adopted new accounting
guidance on transfers of financial assets and consolidation of
VIEs. This new accounting guidance revises sale accounting
criteria for transfers of financial assets, including
elimination of the concept of and accounting for QSPEs, and
significantly changes the criteria by which an enterprise
determines whether it must consolidate a VIE. The adoption of
this new accounting guidance resulted in the consolidation of
certain VIEs that previously were QSPEs and VIEs that were not
recorded on Merrill Lynchs Consolidated Balance Sheet
prior to January 1, 2010. See Note 9 for the initial
impact of the new Consolidation Accounting guidance on Merrill
Lynchs Condensed Consolidated Balance Sheet. Application
of the new consolidation guidance has been deferred indefinitely
for certain investment funds managed on behalf of third parties
if Merrill Lynch does not have an obligation to fund losses that
could potentially be significant to these funds. Any funds
meeting the deferral requirements will continue to be evaluated
for consolidation in accordance with the prior guidance.
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
18
also include various asset and liability transfers and
transactions associated with intercompany sales and trading and
financing activities.
Sale of
U.S. Banks to Bank of America
During 2009, Merrill Lynch sold Merrill Lynch Bank USA
(MLBUSA) and Merrill Lynch Bank &
Trust Co., FSB (MLBT-FSB) to a subsidiary of
Bank of America. In both transactions, Merrill Lynch sold the
shares of the respective entity to Bank of America. The sale
price of each entity was equal to its net book value as of the
date of transfer. Consideration for the sale of MLBUSA was in
the form of an $8.9 billion floating rate demand note
payable from Bank of America to Merrill Lynch, while MLBT-FSB
was sold for cash of approximately $4.4 billion. The demand
note received by Merrill Lynch in connection with the MLBUSA
sale had a stated interest rate that was a market rate at the
time of sale.
The MLBUSA sale was completed on July 1, 2009, and the sale
of MLBT-FSB was completed on November 2, 2009. After each
sale was completed, MLBUSA and MLBT-FSB were merged into Bank of
America, N.A., a subsidiary of Bank of America.
Acquisition
of BAI from Bank of America
In October 2009, Bank of America contributed the shares of BAI,
one of its wholly-owned broker-dealer subsidiaries, to
ML & Co. Subsequent to the transfer, BAI was merged
into Merrill Lynch, Pierce, Fenner & Smith
Incorporated (MLPF&S), a wholly-owned
broker-dealer subsidiary of ML & Co. The net amount
contributed by Bank of America to ML & Co. was equal
to BAIs net book value of approximately $263 million.
In accordance with Business Combinations Accounting, Merrill
Lynchs results of operations for the year ended
December 31, 2009 include the results of BAI as if the
contribution from Bank of America had occurred on
January 1, 2009. BAIs impact on Merrill Lynchs
2009 pre-tax earnings and net earnings was not material.
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 six months ended June 30, 2010,
such asset or liability transfers were not significant. During
the six months ended June 30, 2009, Merrill Lynch
transferred approximately $47 billion each of assets and
liabilities to Bank of America and Bank of America transferred
approximately $40 billion of assets and $18 billion of
liabilities 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 six months ended
June 30, 2010, Merrill Lynch sold approximately
$11 billion of
available-for-sale
securities to Bank of America.
19
Other
Related Party Transactions
Merrill Lynch has entered into various other transactions with
Bank of America, primarily in connection with certain sales and
trading and financing activities. Details on amounts receivable
from and payable to Bank of America as of June 30, 2010 and
December 31, 2009 are presented below:
Receivables from Bank of America are comprised of:
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(dollars in millions)
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June 30, 2010
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December 31, 2009
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Cash and cash equivalents
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$
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16,223
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$
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8,265
|
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Cash and securities segregated for regulatory purposes
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5,817
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3,000
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Receivables under resale agreements and securities borrowed
transactions
|
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5,978
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77
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Trading assets
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953
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700
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Intercompany Funding Receivable
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|
3,101
|
|
|
|
5,778
|
|
Other receivables
|
|
|
2,067
|
|
|
|
2,682
|
|
Other assets
|
|
|
225
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,364
|
|
|
$
|
20,619
|
|
|
|
|
|
|
|
|
|
|
Payables to Bank of America are comprised of:
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
Payables under repurchase agreements
|
|
$
|
12,432
|
|
|
$
|
8,307
|
|
Payables under securities loaned transactions
|
|
|
8,144
|
|
|
|
10,326
|
|
Short term borrowings
|
|
|
18
|
|
|
|
-
|
|
Deposits
|
|
|
32
|
|
|
|
35
|
|
Trading liabilities
|
|
|
282
|
|
|
|
718
|
|
Other payables
|
|
|
4,676
|
|
|
|
4,164
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,584
|
|
|
$
|
23,550
|
|
|
|
|
|
|
|
|
|
|
Total net revenues and non-interest expenses related to
transactions with Bank of America for the three and six months
ended June 30, 2010 were $79 million and
$142 million, and $439 million and $314 million,
respectively. Net revenues for the six months ended
June 30, 2010 included a realized gain of approximately
$280 million from the sale of approximately
$11 billion of
available-for-sale
securities to Bank of America. Total net revenues and
non-interest expenses related to transactions with Bank of
America for the three and six months ended June 30, 2009
were $142 million and $27 million, and
$211 million and $54 million, respectively.
Segment
Information
Prior to the acquisition by Bank of America, Merrill
Lynchs operations were organized and reported as two
operating segments in accordance with the criteria in
ASC 280, Segment Reporting (Segment
Reporting): Global Markets and Investment Banking
(GMI) and Global Wealth Management (GWM).
As a result of the acquisition by Bank of America, Merrill Lynch
reevaluated the provisions of Segment Reporting in the first
quarter of 2009. Pursuant to Segment Reporting, operating
segments represent components of an enterprise for which
separate financial information is available that is regularly
evaluated by the chief operating decision maker in determining
how to allocate resources and in assessing performance. Based
upon how the chief operating decision maker of Merrill Lynch
reviews results in terms of allocating resources and assessing
performance, it was determined that
20
Merrill Lynch does not contain any identifiable operating
segments under Segment Reporting. As a result, the financial
information of Merrill Lynch is presented as a single segment.
Geographic
Information
Merrill Lynch conducts its business activities through offices
in the following five regions:
|
|
|
United States;
|
|
|
Europe, Middle East, and Africa (EMEA);
|
|
|
Pacific Rim;
|
|
|
Latin America; and
|
|
|
Canada.
|
The principal methodologies used in preparing the geographic
information below are as follows:
|
|
|
Revenues are generally recorded based on the location of the
employee generating the revenue; and
|
|
|
Intercompany transfers are based primarily on service agreements.
|
The information that follows, in managements judgment,
provides a reasonable representation of each regions
contribution to the consolidated net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Three Months Ended
|
|
Six Months Ended
|
(dollars in millions)
|
|
June 30, 2010
|
|
June 30, 2010
|
|
June 30, 2009
|
|
June 30, 2009
|
|
|
Revenues, net of interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe, Middle East, and Africa
|
|
$
|
611
|
|
|
$
|
2,732
|
|
|
$
|
1,130
|
|
|
$
|
3,065
|
|
Pacific Rim
|
|
|
322
|
|
|
|
1,100
|
|
|
|
588
|
|
|
|
1,394
|
|
Latin America
|
|
|
240
|
|
|
|
580
|
|
|
|
162
|
|
|
|
397
|
|
Canada
|
|
|
55
|
|
|
|
128
|
|
|
|
62
|
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non-U.S.
|
|
|
1,228
|
|
|
|
4,540
|
|
|
|
1,942
|
|
|
|
4,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States (1)(2)
|
|
|
4,489
|
|
|
|
8,704
|
|
|
|
107
|
|
|
|
7,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net of interest expense
|
|
$
|
5,717
|
|
|
$
|
13,244
|
|
|
$
|
2,049
|
|
|
$
|
12,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
U.S. results for the three and
six months ended June 30, 2010 included gains of
$1.2 billion and $1.4 billion, respectively, due to
the impact of the widening of Merrill Lynchs credit
spreads on the carrying values of certain long-term borrowings,
primarily structured notes. U.S. results for the three and six
months ended June 30, 2009 included net losses of
$3.6 billion and $1.4 billion, respectively, due to
the impact of the narrowing of Merrill Lynchs credit
spreads on the carrying values of certain long-term borrowings,
primarily structured notes. |
(2) |
|
Corporate net revenues and
adjustments are reflected in the U.S. region. |
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.
21
The fair value hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable
inputs (Level 3).
Financial assets and liabilities recorded on the Condensed
Consolidated Balance Sheets are categorized based on the inputs
to the valuation techniques as follows:
|
|
Level 1.
|
Financial assets and liabilities whose values are based on
unadjusted quoted prices for identical assets or liabilities in
an active market that Merrill Lynch has the ability to access
(examples include active exchange-traded equity securities,
exchange-traded derivatives, U.S. Government securities,
and certain other sovereign government obligations).
|
|
Level 2.
|
Financial assets and liabilities whose values are based on
quoted prices in markets that are not active or model inputs
that are observable either directly or indirectly for
substantially the full term of the asset or liability.
Level 2 inputs include the following:
|
|
|
|
|
a)
|
Quoted prices for similar assets or liabilities in active
markets (examples include restricted stock and U.S. agency
securities);
|
|
|
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in
non-active markets (examples include corporate and municipal
bonds, which can trade infrequently);
|
|
|
|
|
c)
|
Pricing models whose inputs are observable for substantially the
full term of the asset or liability (examples include most
over-the-counter
derivatives, including interest rate and currency
swaps); and
|
|
|
|
|
d)
|
Pricing models whose inputs are derived principally from or
corroborated by observable market data through correlation or
other means for substantially the full term of the asset or
liability (examples include certain residential and commercial
mortgage-related assets, including loans, securities and
derivatives).
|
|
|
Level 3. |
Financial assets and liabilities whose values are based on
prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value
measurement. These inputs reflect managements view about
the assumptions a market participant would use in pricing the
asset or liability (examples include certain private equity
investments, certain residential and commercial mortgage-related
assets and long-dated or complex derivatives).
|
As required by Fair Value Accounting, when the inputs used to
measure fair value fall within different levels of the
hierarchy, the level within which the fair value measurement is
categorized is based on the lowest level input that is
significant to the fair value measurement in its entirety. For
example, a Level 3 fair value measurement may include
inputs that are observable (Levels 1 and 2) and
unobservable (Level 3). Therefore gains and losses for such
assets and liabilities categorized within the Level 3
reconciliation 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 reconciliations do not take into consideration the
offsetting effect of Level 1 and 2 financial instruments
entered into by Merrill Lynch that economically hedge certain
exposures to the Level 3 positions.
A review of fair value hierarchy classifications is conducted on
a quarterly basis. Changes in the observability of valuation
inputs may result in a reclassification for certain financial
assets or liabilities. Level 3 gains and losses represent
amounts incurred during the period in which the instrument was
classified as Level 3. Reclassifications impacting
Level 3 of the fair value hierarchy 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.
22
Transfers between Level 1 and Level 2 assets and
liabilities were not significant for the quarter ended
June 30, 2010.
Valuation
Techniques
The following outlines the valuation methodologies for Merrill
Lynchs material categories of assets and liabilities:
U.S.
Government and agencies
U.S. treasury securities U.S. treasury
securities are valued using quoted market prices and are
generally classified as Level 1 in the fair value hierarchy.
U.S. agency securities U.S. agency securities
are comprised of two main categories consisting of agency issued
debt and mortgage pass-throughs. Agency issued debt securities
are generally valued using quoted market prices. Mortgage
pass-throughs include To-be-announced (TBA)
securities and mortgage pass-through certificates. TBA
securities are generally valued using quoted market prices. The
fair value of mortgage pass-through certificates are model
driven based on the comparable TBA security. Agency issued debt
securities and mortgage pass-throughs are generally classified
as Level 2 in the fair value hierarchy.
Non-U.S.
governments and agencies
Sovereign government obligations are valued using quoted prices
in active markets when available. To the extent quoted prices
are not available, fair value is determined based on reference
to recent trading activity and quoted prices of similar
securities. These securities are generally classified in
Level 1 or Level 2 in the fair value hierarchy,
primarily based on the issuing country.
Municipal
debt
Municipal bonds The fair value of municipal bonds is
calculated using recent trade activity, market price quotations
and new issuance levels. In the absence of this information,
fair value is calculated using comparable bond credit spreads.
Current interest rates, credit events, and individual bond
characteristics such as coupon, call features, maturity, and
revenue purpose are considered in the valuation process. The
majority of these bonds are classified as Level 2 in the
fair value hierarchy.
Auction Rate Securities (ARS) Merrill Lynch
holds investments in certain ARS, including student loan and
municipal ARS. Student loan ARS are comprised of various pools
of student loans. Municipal ARS are issued by states and
municipalities for a wide variety of purposes, including but not
limited to healthcare, industrial development, education and
transportation infrastructure. The fair value of the student
loan ARS is calculated using a pricing model that relies upon a
number of assumptions including weighted average life, coupon,
discount margin and liquidity discounts. The fair value of the
municipal ARS is calculated based upon projected refinancing and
spread assumptions. In both cases, recent trades and issuer
tenders are considered in the valuations. Student loan ARS and
municipal ARS are classified as Level 3 in the fair value
hierarchy.
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
23
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.
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.
24
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 given that these instruments are not
actively quoted. 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 analyses.
CDOs The fair value of CDOs is derived from a referenced
basket of CDS, the CDOs capital structure, and the default
correlation, which is an input to a proprietary CDO valuation
model. The underlying CDO portfolios typically contain
investment grade as well as non-investment grade obligors. After
adjusting for differences in risk profile, the correlation
parameter for an actual transaction is estimated by benchmarking
against observable standardized index tranches and other
comparable transactions. CDOs are classified as either
Level 2 or Level 3 in the fair value hierarchy.
Investment
securities non-qualifying
Investments in Private Equity, Real Estate and Hedge
Funds Merrill Lynch has investments in numerous asset
classes, including: direct private equity, private equity funds,
hedge funds and real estate funds. Valuing these investments
requires significant management judgment due to the nature of
the assets and the lack of quoted market prices and liquidity in
these assets. Initially, the transaction price of the investment
is generally considered to be the best indicator of fair value.
Thereafter, valuation of direct investments is based on an
assessment of each individual investment using various
methodologies, which include publicly traded comparables derived
by multiplying a key performance metric (e.g., earnings before
interest, taxes, depreciation and amortization) of the portfolio
company by the relevant valuation multiple observed for
comparable companies, acquisition comparables, entry level
multiples and discounted cash flows. These valuations are
subject to appropriate discounts for lack of liquidity or
marketability. Certain factors which may influence changes to
fair value include but are not limited to, recapitalizations,
subsequent rounds of financing, and offerings in the equity or
debt capital markets. For fund investments, Merrill Lynch
generally records the fair value of its proportionate interest
in the funds capital as reported by the funds
respective managers.
Publicly traded private equity investments are primarily
classified as either Level 1 or Level 2 in the fair
value hierarchy. Level 2 classifications generally include
those publicly traded equity investments that have a legal or
contractual transfer restriction. All other investments are
classified as Level 3 in the fair value hierarchy due to
infrequent trading
and/or
unobservable market prices.
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.
25
Long-term
and short term borrowings
Merrill Lynch and its consolidated VIEs issue structured notes
that have coupons or repayment terms linked to the performance
of debt or equity securities, indices, currencies or
commodities. The fair value of structured notes is estimated
using valuation models for the combined derivative and debt
portions of the notes when the fair value option has been
elected. These models incorporate observable and in some
instances unobservable inputs including security prices,
interest rate yield curves, option volatility, currency,
commodity or equity rates and correlations between these inputs.
The impact of Merrill Lynchs own credit spreads is also
included based on Merrill Lynchs observed secondary bond
market spreads. Structured notes are classified as either
Level 2 or Level 3 in the fair value hierarchy.
Recurring
Fair Value
The following tables present Merrill Lynchs fair value
hierarchy for those assets and liabilities measured at fair
value on a recurring basis as of June 30, 2010 and
December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of June 30, 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
|
|
$
|
-
|
|
|
$
|
127
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
127
|
|
Corporate debt
|
|
|
-
|
|
|
|
507
|
|
|
|
-
|
|
|
|
-
|
|
|
|
507
|
|
Non-U.S.
governments and agencies
|
|
|
856
|
|
|
|
1,018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,874
|
|
U.S. Government and agencies
|
|
|
475
|
|
|
|
1,599
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities segregated for regulatory purposes or deposited
with clearing organizations
|
|
|
1,331
|
|
|
|
3,251
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
|
-
|
|
|
|
45,030
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,030
|
|
Receivables under securities borrowed transactions
|
|
|
-
|
|
|
|
1,349
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,349
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
18,516
|
|
|
|
7,101
|
|
|
|
251
|
|
|
|
-
|
|
|
|
25,868
|
|
Convertible debentures
|
|
|
-
|
|
|
|
4,701
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,701
|
|
Non-U.S.
governments and agencies
|
|
|
26,179
|
|
|
|
3,008
|
|
|
|
930
|
|
|
|
-
|
|
|
|
30,117
|
|
Corporate debt
|
|
|
-
|
|
|
|
10,809
|
|
|
|
5,402
|
|
|
|
|
|
|
|
16,211
|
|
Preferred stock
|
|
|
-
|
|
|
|
322
|
|
|
|
188
|
|
|
|
-
|
|
|
|
510
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
-
|
|
|
|
1,656
|
|
|
|
5,860
|
|
|
|
-
|
|
|
|
7,516
|
|
U.S. Government and agencies
|
|
|
2,924
|
|
|
|
340
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,264
|
|
Municipals and money markets
|
|
|
721
|
|
|
|
7,929
|
|
|
|
3,116
|
|
|
|
-
|
|
|
|
11,766
|
|
Physical commodities and other
|
|
|
-
|
|
|
|
769
|
|
|
|
-
|
|
|
|
-
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
48,340
|
|
|
|
36,635
|
|
|
|
15,747
|
|
|
|
-
|
|
|
|
100,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
contracts(2)
|
|
|
610
|
|
|
|
731,879
|
|
|
|
16,999
|
|
|
|
(702,757
|
)
|
|
|
46,731
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities agency collateralized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mortgage obligations
|
|
|
-
|
|
|
|
743
|
|
|
|
-
|
|
|
|
-
|
|
|
|
743
|
|
Mortgage-backed securities non-agency MBSs
|
|
|
-
|
|
|
|
639
|
|
|
|
352
|
|
|
|
-
|
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
-
|
|
|
|
1,382
|
|
|
|
352
|
|
|
|
-
|
|
|
|
1,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
2,053
|
|
|
|
445
|
|
|
|
4,128
|
|
|
|
-
|
|
|
|
6,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
2,053
|
|
|
|
1,827
|
|
|
|
4,480
|
|
|
|
-
|
|
|
|
8,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities received as collateral
|
|
|
20,479
|
|
|
|
473
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,952
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
373
|
|
|
|
3,152
|
|
|
|
-
|
|
|
|
3,525
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of June 30, 2010
|
|
|
|
|
|
|
|
|
Netting
|
|
|
(dollars in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
$
|
-
|
|
|
$
|
42,614
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
42,614
|
|
Short-term borrowings
|
|
|
-
|
|
|
|
6,752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,752
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
17,053
|
|
|
|
1,455
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,508
|
|
Convertible debentures
|
|
|
-
|
|
|
|
828
|
|
|
|
-
|
|
|
|
-
|
|
|
|
828
|
|
Non-U.S.
governments and agencies
|
|
|
20,646
|
|
|
|
1,105
|
|
|
|
7
|
|
|
|
-
|
|
|
|
21,758
|
|
Corporate debt
|
|
|
-
|
|
|
|
3,261
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,261
|
|
U.S. Government and agencies
|
|
|
2,220
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,220
|
|
Municipals, money markets and other
|
|
|
397
|
|
|
|
135
|
|
|
|
-
|
|
|
|
-
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
40,316
|
|
|
|
6,784
|
|
|
|
7
|
|
|
|
-
|
|
|
|
47,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
contracts(2)
|
|
|
541
|
|
|
|
729,531
|
|
|
|
10,409
|
|
|
|
(702,602
|
)
|
|
|
37,879
|
|
Obligation to return securities received as collateral
|
|
|
20,479
|
|
|
|
473
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,952
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
30
|
|
|
|
154
|
|
|
|
-
|
|
|
|
184
|
|
Long-term borrowings
|
|
|
-
|
|
|
|
35,582
|
|
|
|
4,006
|
|
|
|
-
|
|
|
|
39,588
|
|
|
|
|
|
|
(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 $6.6 billion, $5.8 billion of other credit
derivatives that incorporate unobservable correlation, and
$4.5 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 $4.0 billion, $2.0 billion of other credit
derivatives that incorporate unobservable correlation, and
$4.3 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 $2.6 billion that are
long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation) and non-recourse borrowings issued by consolidated
VIEs of $1.0 billion that hold Level 3 residential
mortgages.
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis
|
|
|
as of December 31, 2009
|
|
|
|
|
|
|
|
|
Netting
|
|
|
(dollars in millions)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Adj(1)
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes or deposited with
clearing organizations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed and asset-backed
|
|
$
|
-
|
|
|
$
|
5,525
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,525
|
|
Corporate debt
|
|
|
-
|
|
|
|
579
|
|
|
|
-
|
|
|
|
-
|
|
|
|
579
|
|
Non-U.S.
governments and agencies
|
|
|
946
|
|
|
|
893
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,839
|
|
U.S. Government and agencies
|
|
|
1,046
|
|
|
|
1,541
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities segregated for regulatory purposes or deposited
with clearing organizations
|
|
|
1,992
|
|
|
|
8,538
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
|
-
|
|
|
|
41,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,740
|
|
Receivables under securities borrowed transactions
|
|
|
-
|
|
|
|
2,888
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,888
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
|
23,083
|
|
|
|
6,297
|
|
|
|
259
|
|
|
|
-
|
|
|
|
29,639
|
|
Convertible debentures
|
|
|
-
|
|
|
|
4,862
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,862
|
|
Non-U.S.
governments and agencies
|
|
|
17,407
|
|
|
|
2,718
|
|
|
|
1,131
|
|
|
|
-
|
|
|
|
21,256
|
|
Corporate debt
|
|
|
-
|
|
|
|
9,241
|
|
|
|
6,540
|
|
|
|
-
|
|
|
|
15,781
|
|
Preferred stock
|
|
|
-
|
|
|
|
436
|
|
|
|
562
|
|
|
|
-
|
|
|
|
998
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
-
|
|
|
|
1,680
|
|
|
|
6,291
|
|
|
|
-
|
|
|
|
7,971
|
|
U.S. Government and agencies
|
|
|
979
|
|
|
|
479
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,458
|
|
Municipals and money markets
|
|
|
798
|
|
|
|
5,181
|
|
|
|
2,148
|
|
|
|
-
|
|
|
|
8,127
|
|
Physical commodities and other
|
|
|
-
|
|
|
|
651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
42,267
|
|
|
|
31,545
|
|
|
|
16,931
|
|
|
|
-
|
|
|
|
90,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
|
2,218
|
|
|
|
658,264
|
|
|
|
17,939
|
|
|
|
(628,839
|
)
|
|
|
49,582
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
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. |
28
Level 3 derivative contracts (assets) primarily relate to
derivative positions on U.S. ABS CDOs and other mortgage
products of $7.5 billion, $5.0 billion of other credit
derivatives that incorporate unobservable correlation, and
$5.4 billion of equity, currency, interest rate and
commodity derivatives that are long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation).
Level 3 non-qualifying investment securities primarily
relate to certain private equity positions.
Level 3 loans, notes and mortgages primarily relate to
residential mortgage and corporate loans.
Level 3 derivative contracts (liabilities) primarily relate
to derivative positions on U.S. ABS CDOs and other mortgage
products of $4.1 billion, $2.2 billion of other credit
derivatives that incorporate unobservable correlation, and
$4.8 billion of equity, currency, interest rate and
commodity derivatives that are long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation).
Level 3 long-term borrowings primarily relate to
equity-linked structured notes of $3.6 billion that are
long-dated
and/or have
unobservable model valuation inputs (e.g., unobservable
correlation).
The following tables provide a summary of changes in fair value
of Merrill Lynchs Level 3 financial assets and
liabilities for the three and six months ended June 30,
2010 and June 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Three Months Ended June 30, 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
|
|
$
|
245
|
|
|
$
|
(12
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(12
|
)
|
|
$
|
-
|
|
|
$
|
(20
|
)
|
|
$
|
38
|
|
|
$
|
-
|
|
|
$
|
251
|
|
Non-U.S.
governments and agencies
|
|
|
1,056
|
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
(51
|
)
|
|
|
4
|
|
|
|
(3
|
)
|
|
|
930
|
|
Corporate debt
|
|
|
6,026
|
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
(657
|
)
|
|
|
287
|
|
|
|
(178
|
)
|
|
|
5,402
|
|
Preferred stock
|
|
|
210
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
188
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
6,399
|
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56
|
|
|
|
-
|
|
|
|
(723
|
)
|
|
|
361
|
|
|
|
(233
|
)
|
|
|
5,860
|
|
Municipals and money markets
|
|
|
2,819
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
251
|
|
|
|
160
|
|
|
|
(113
|
)
|
|
|
3,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
16,755
|
|
|
|
(132
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(132
|
)
|
|
|
-
|
|
|
|
(1,198
|
)
|
|
|
850
|
|
|
|
(528
|
)
|
|
|
15,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
7,280
|
|
|
|
(217
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(217
|
)
|
|
|
-
|
|
|
|
(18
|
)
|
|
|
(520
|
)
|
|
|
65
|
|
|
|
6,590
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - residential non-agency MBSs
|
|
|
585
|
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
(25
|
)
|
|
|
(152
|
)
|
|
|
3
|
|
|
|
(12
|
)
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
585
|
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
(47
|
)
|
|
|
(25
|
)
|
|
|
(152
|
)
|
|
|
3
|
|
|
|
(12
|
)
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
3,490
|
|
|
|
-
|
|
|
|
848
|
|
|
|
-
|
|
|
|
848
|
|
|
|
-
|
|
|
|
(210
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
4,075
|
|
|
|
-
|
|
|
|
801
|
|
|
|
-
|
|
|
|
801
|
|
|
|
(25
|
)
|
|
|
(362
|
)
|
|
|
3
|
|
|
|
(12
|
)
|
|
|
4,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
3,532
|
|
|
|
-
|
|
|
|
10
|
|
|
|
45
|
|
|
|
55
|
|
|
|
-
|
|
|
|
(435
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,152
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
369
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
(369
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
369
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
9
|
|
|
|
-
|
|
|
|
(369
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
148
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
Long-term borrowings
|
|
|
4,519
|
|
|
|
472
|
|
|
|
113
|
|
|
|
-
|
|
|
|
585
|
|
|
|
-
|
|
|
|
(249
|
)
|
|
|
545
|
|
|
|
(224
|
)
|
|
|
4,006
|
|
|
|
29
Other revenue related to investment securities non-qualifying
primarily represents net gains on certain private equity
investments.
Transfers in for net derivative contracts are primarily due to a
lack of price observability for certain credit default and total
return swap liabilities related to CDO positions.
Transfers in and transfers out related to long-term borrowings
are primarily due to changes in the impact of unobservable
inputs on the value of certain equity-linked structured notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Six Months Ended June 30, 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
|
|
|
$
|
(10
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(10
|
)
|
|
$
|
-
|
|
|
$
|
(27
|
)
|
|
$
|
69
|
|
|
$
|
(40
|
)
|
|
$
|
251
|
|
Non-U.S.
governments and agencies
|
|
|
1,131
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
(79
|
)
|
|
|
91
|
|
|
|
(54
|
)
|
|
|
930
|
|
Corporate debt
|
|
|
6,540
|
|
|
|
136
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136
|
|
|
|
-
|
|
|
|
(1,264
|
)
|
|
|
587
|
|
|
|
(597
|
)
|
|
|
5,402
|
|
Preferred stock
|
|
|
562
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
(348
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
188
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
6,291
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(413
|
)
|
|
|
383
|
|
|
|
(397
|
)
|
|
|
5,860
|
|
Municipals and money markets
|
|
|
2,148
|
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
(169
|
)
|
|
|
1,234
|
|
|
|
(113
|
)
|
|
|
3,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
16,931
|
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(46
|
)
|
|
|
-
|
|
|
|
(2,300
|
)
|
|
|
2,364
|
|
|
|
(1,202
|
)
|
|
|
15,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
6,866
|
|
|
|
(636
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(636
|
)
|
|
|
-
|
|
|
|
(153
|
)
|
|
|
509
|
|
|
|
4
|
|
|
|
6,590
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - residential non-agency MBSs
|
|
|
473
|
|
|
|
-
|
|
|
|
(67
|
)
|
|
|
24
|
|
|
|
(43
|
)
|
|
|
(52
|
)
|
|
|
(69
|
)
|
|
|
55
|
|
|
|
(12
|
)
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
473
|
|
|
|
-
|
|
|
|
(67
|
)
|
|
|
24
|
|
|
|
(43
|
)
|
|
|
(52
|
)
|
|
|
(69
|
)
|
|
|
55
|
|
|
|
(12
|
)
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
3,696
|
|
|
|
-
|
|
|
|
1,211
|
|
|
|
-
|
|
|
|
1,211
|
|
|
|
-
|
|
|
|
(644
|
)
|
|
|
-
|
|
|
|
(135
|
)
|
|
|
4,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
4,169
|
|
|
|
-
|
|
|
|
1,144
|
|
|
|
24
|
|
|
|
1,168
|
|
|
|
(52
|
)
|
|
|
(713
|
)
|
|
|
55
|
|
|
|
(147
|
)
|
|
|
4,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
4,115
|
|
|
|
-
|
|
|
|
(141
|
)
|
|
|
91
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
(913
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
3,152
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
386
|
|
|
|
21
|
|
|
|
2
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
(380
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
386
|
|
|
|
21
|
|
|
|
2
|
|
|
|
-
|
|
|
|
23
|
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
(380
|
)
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
186
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
(21
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
154
|
|
Long-term borrowings
|
|
|
4,683
|
|
|
|
595
|
|
|
|
192
|
|
|
|
-
|
|
|
|
787
|
|
|
|
-
|
|
|
|
203
|
|
|
|
816
|
|
|
|
(909
|
)
|
|
|
4,006
|
|
|
|
Other revenue related to investment securities non-qualifying
primarily represents net gains on certain private equity
investments.
Decreases in purchases, issuances and settlements related to
corporate debt primarily relates to the sale of certain
positions (e.g., ARS) during the first and second quarter of
2010.
Transfers in for municipals and money markets relates to reduced
price transparency (e.g., lower trading activity) for municipal
ARS. Transfers in and transfers out related to long-term
borrowings are
30
primarily due to changes in the impact of unobservable inputs on
the value of certain equity-linked structured notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Three Months Ended June 30, 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
|
|
$
|
379
|
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
(12
|
)
|
|
$
|
(33
|
)
|
|
$
|
330
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
7,399
|
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(82
|
)
|
|
|
-
|
|
|
|
2,957
|
|
|
|
(3,098
|
)
|
|
|
7,176
|
|
Corporate debt
|
|
|
5,499
|
|
|
|
245
|
|
|
|
-
|
|
|
|
-
|
|
|
|
245
|
|
|
|
-
|
|
|
|
(1,093
|
)
|
|
|
(647
|
)
|
|
|
4,004
|
|
Preferred stock
|
|
|
6,759
|
|
|
|
(81
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(81
|
)
|
|
|
-
|
|
|
|
(87
|
)
|
|
|
-
|
|
|
|
6,591
|
|
Non-U.S.
governments and agencies
|
|
|
601
|
|
|
|
79
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79
|
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
691
|
|
Municipals and money markets
|
|
|
1,046
|
|
|
|
(64
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(64
|
)
|
|
|
-
|
|
|
|
(51
|
)
|
|
|
-
|
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
21,683
|
|
|
|
93
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
|
|
1,725
|
|
|
|
(3,778
|
)
|
|
|
19,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
3,868
|
|
|
|
(820
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(820
|
)
|
|
|
-
|
|
|
|
(361
|
)
|
|
|
3,561
|
|
|
|
6,248
|
|
Investment securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
38
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
1
|
|
|
|
38
|
|
Corporate debt
|
|
|
146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(146
|
)
|
|
|
-
|
|
Non-U.S.
governments and agencies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
174
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities trading
|
|
|
184
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
29
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities non-agency MBSs
|
|
|
3,193
|
|
|
|
-
|
|
|
|
(274
|
)
|
|
|
-
|
|
|
|
(274
|
)
|
|
|
662
|
|
|
|
(418
|
)
|
|
|
64
|
|
|
|
3,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
3,193
|
|
|
|
-
|
|
|
|
(274
|
)
|
|
|
-
|
|
|
|
(274
|
)
|
|
|
662
|
|
|
|
(418
|
)
|
|
|
64
|
|
|
|
3,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
2,494
|
|
|
|
-
|
|
|
|
327
|
|
|
|
-
|
|
|
|
327
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
2,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
5,871
|
|
|
|
1
|
|
|
|
53
|
|
|
|
-
|
|
|
|
54
|
|
|
|
662
|
|
|
|
(420
|
)
|
|
|
104
|
|
|
|
6,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
6,144
|
|
|
|
-
|
|
|
|
975
|
|
|
|
-
|
|
|
|
975
|
|
|
|
-
|
|
|
|
(860
|
)
|
|
|
(174
|
)
|
|
|
6,085
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
326
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
326
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables interest and other
|
|
|
999
|
|
|
|
-
|
|
|
|
278
|
|
|
|
-
|
|
|
|
278
|
|
|
|
-
|
|
|
|
(54
|
)
|
|
|
(39
|
)
|
|
|
628
|
|
Long-term borrowings
|
|
|
8,049
|
|
|
|
(1,065
|
)
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
(1,112
|
)
|
|
|
-
|
|
|
|
(370
|
)
|
|
|
(3,502
|
)
|
|
|
5,289
|
|
|
|
Net losses in principal transactions related to long-term
borrowings were primarily due to the narrowing of Merrill
Lynchs credit spreads on certain equity linked notes.
Increases in purchases, issuances and settlements related to
mortgages, mortgage-backed and asset-backed securities are
primarily the result of purchases by a special purpose entity
(SPE) which is consolidated by Merrill Lynch.
Decreases in purchases, issuances and settlements related to
corporate debt are primarily due to sales of positions during
the second quarter of 2009.
Net transfers out for mortgages, mortgage-backed and
asset-backed securities primarily relates to increased price
verification (e.g. external vendor quotes and trading activity)
for certain U.S. ABS CDO underlying collateral types. Net
transfers in for net derivative contracts primarily relates to
decreased price verification for certain underlying
U.S. ABS CDOs and other mortgage positions. Net
31
transfers out for long-term borrowings were primarily due to
decreases in the significance of unobservable pricing inputs for
certain equity linked notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Level 3 Financial Assets and Liabilities
|
|
|
Six Months Ended June 30, 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
|
|
|
$
|
(22
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(22
|
)
|
|
$
|
-
|
|
|
$
|
172
|
|
|
$
|
(51
|
)
|
|
$
|
330
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
7,568
|
|
|
|
(332
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(332
|
)
|
|
|
-
|
|
|
|
2,368
|
|
|
|
(2,428
|
)
|
|
|
7,176
|
|
Corporate debt
|
|
|
10,149
|
|
|
|
(230
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(230
|
)
|
|
|
-
|
|
|
|
(1,487
|
)
|
|
|
(4,428
|
)
|
|
|
4,004
|
|
Preferred stock
|
|
|
3,344
|
|
|
|
(190
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(190
|
)
|
|
|
-
|
|
|
|
3,332
|
|
|
|
105
|
|
|
|
6,591
|
|
Non-U.S.
governments and agencies
|
|
|
30
|
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
|
|
-
|
|
|
|
10
|
|
|
|
587
|
|
|
|
691
|
|
Municipals and money markets
|
|
|
798
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
146
|
|
|
|
(13
|
)
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
22,120
|
|
|
|
(710
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(710
|
)
|
|
|
-
|
|
|
|
4,541
|
|
|
|
(6,228
|
)
|
|
|
19,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
2,307
|
|
|
|
93
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
-
|
|
|
|
80
|
|
|
|
3,768
|
|
|
|
6,248
|
|
Investment securities trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages, mortgage-backed and asset-backed
|
|
|
22
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
30
|
|
|
|
38
|
|
Corporate debt
|
|
|
146
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(137
|
)
|
|
|
-
|
|
Non-U.S.
governments and agencies
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
174
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities trading
|
|
|
168
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
67
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities non- agency MBSs
|
|
|
350
|
|
|
|
-
|
|
|
|
(274
|
)
|
|
|
178
|
|
|
|
(96
|
)
|
|
|
1,311
|
|
|
|
(510
|
)
|
|
|
2,172
|
|
|
|
3,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
available-for-sale
|
|
|
350
|
|
|
|
-
|
|
|
|
(274
|
)
|
|
|
178
|
|
|
|
(96
|
)
|
|
|
1,311
|
|
|
|
(510
|
)
|
|
|
2,172
|
|
|
|
3,227
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
2,761
|
|
|
|
-
|
|
|
|
148
|
|
|
|
-
|
|
|
|
148
|
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
(54
|
)
|
|
|
2,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
3,279
|
|
|
|
(19
|
)
|
|
|
(126
|
)
|
|
|
178
|
|
|
|
33
|
|
|
|
1,311
|
|
|
|
(537
|
)
|
|
|
2,185
|
|
|
|
6,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
359
|
|
|
|
-
|
|
|
|
509
|
|
|
|
-
|
|
|
|
509
|
|
|
|
-
|
|
|
|
(594
|
)
|
|
|
5,811
|
|
|
|
6,085
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
348
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
348
|
|
|
|
352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
-
|
|
|
|
670
|
|
|
|
-
|
|
|
|
670
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,298
|
|
|
|
628
|
|
Long-term borrowings
|
|
|
7,480
|
|
|
|
(1,564
|
)
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
(1,604
|
)
|
|
|
-
|
|
|
|
33
|
|
|
|
(3,828
|
)
|
|
|
5,289
|
|
|
|
Net losses in principal transactions related to long-term
borrowings were primarily due to the narrowing of Merrill
Lynchs credit spreads on certain equity linked notes.
Increases in purchases, issuances and settlements related to
mortgages, mortgage-backed and asset-backed securities are
primarily the result of purchases by an SPE which is
consolidated by Merrill Lynch. Decreases in purchases,
issuances and settlements related to corporate debt are
primarily due to sales of positions during the second quarter of
2009. Increases in purchases, issuances and settlements of
preferred stock were primarily attributable to the purchase of
ARS in the first quarter of 2009.
Net transfers out for mortgages, mortgage-backed and
asset-backed securities primarily relates to increased price
verification (e.g. external vendor quotes and trading activity)
for certain U.S. ABS CDO underlying collateral types. Net
transfers out for corporate debt primarily relates to the
reclassification in the first quarter of 2009 of certain loans
from trading assets to loans, notes and mortgages held for
investment, which are not measured at fair value. Net transfers
in for net derivative contracts primarily relates to decreased
price verification for certain underlying U.S. ABS CDOs and
32
other mortgage positions. Net transfers in for
available-for-sale
mortgage-backed securities non agency MBSs is the
result of changes in price transparency. Net transfers in for
loans, notes and mortgages relates to the fair value option
election by Merrill Lynch for certain mortgage, corporate and
leveraged loans as a result of its acquisition by Bank of
America. Net transfers in for other payables
interest and other relates to the fair value option election by
Merrill Lynch for certain loan commitments as a result of its
acquisition by Bank of America. Net transfers out for long-term
borrowings were primarily due to decreases in the significance
of unobservable pricing inputs for certain equity linked notes.
The following tables provide the portion of gains or losses
included in income for the three and six months ended
June 30, 2010 and June 30, 2009 attributable to
unrealized gains or losses relating to those Level 3 assets
and liabilities held at June 30, 2010 and June 30,
2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Unrealized Gains or (Losses) for Level 3 Assets and
Liabilities Still Held
|
|
|
Three Months Ended June 30, 2010
|
|
Six Months Ended June 30, 2010
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
(12
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(12
|
)
|
|
$
|
(16
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(16
|
)
|
Non-U.S.
governments and agencies
|
|
|
(76
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(76
|
)
|
|
|
(159
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(159
|
)
|
Corporate debt
|
|
|
(105
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(105
|
)
|
|
|
19
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19
|
|
Preferred stock
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(23
|
)
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
Mortgages, mortgage-backed and asset-backed
|
|
|
41
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(23
|
)
|
Municipals and money markets
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
(176
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(176
|
)
|
|
|
(188
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
(224
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(224
|
)
|
|
|
(590
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(590
|
)
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - non-agency MBSs
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
24
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(22
|
)
|
|
|
24
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
-
|
|
|
|
688
|
|
|
|
-
|
|
|
|
688
|
|
|
|
-
|
|
|
|
482
|
|
|
|
-
|
|
|
|
482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
-
|
|
|
|
686
|
|
|
|
-
|
|
|
|
686
|
|
|
|
-
|
|
|
|
460
|
|
|
|
24
|
|
|
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
(61
|
)
|
|
|
-
|
|
|
|
(61
|
)
|
|
|
-
|
|
|
|
(39
|
)
|
|
|
-
|
|
|
|
(39
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
23
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
(19
|
)
|
|
|
-
|
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
Long-term borrowings
|
|
|
384
|
|
|
|
113
|
|
|
|
-
|
|
|
|
497
|
|
|
|
494
|
|
|
|
191
|
|
|
|
-
|
|
|
|
685
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Unrealized Gains or (Losses) for Level 3 Assets and
Liabilities Still Held
|
|
|
Three Months Ended June 30, 2009
|
|
Six Months Ended June 30, 2009
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
Principal
|
|
Other
|
|
|
|
|
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
Transactions
|
|
Revenue
|
|
Interest
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
(4
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4
|
)
|
|
$
|
(22
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(22
|
)
|
Non-U.S.
governments and agencies
|
|
|
79
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79
|
|
|
|
64
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64
|
|
Corporate debt
|
|
|
231
|
|
|
|
-
|
|
|
|
-
|
|
|
|
231
|
|
|
|
(256
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(256
|
)
|
Preferred stock
|
|
|
(81
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(81
|
)
|
|
|
(190
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(190
|
)
|
Mortgages, mortgage-backed and asset-backed
|
|
|
(70
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(70
|
)
|
|
|
(348
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(348
|
)
|
Municipals and money markets
|
|
|
(63
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(63
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading assets, excluding derivative contracts
|
|
|
92
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92
|
|
|
|
(751
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts, net
|
|
|
(907
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(907
|
)
|
|
|
84
|
|
|
|
-
|
|
|
|
-
|
|
|
|
84
|
|
Investment securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities - non-agency MBSs
|
|
|
-
|
|
|
|
(293
|
)
|
|
|
-
|
|
|
|
(293
|
)
|
|
|
-
|
|
|
|
(293
|
)
|
|
|
178
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available-for-sale
|
|
|
-
|
|
|
|
(293
|
)
|
|
|
-
|
|
|
|
(293
|
)
|
|
|
-
|
|
|
|
(293
|
)
|
|
|
178
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
|
-
|
|
|
|
327
|
|
|
|
-
|
|
|
|
327
|
|
|
|
-
|
|
|
|
148
|
|
|
|
-
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
34
|
|
|
|
-
|
|
|
|
(145
|
)
|
|
|
178
|
|
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
975
|
|
|
|
-
|
|
|
|
975
|
|
|
|
-
|
|
|
|
509
|
|
|
|
-
|
|
|
|
509
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading liabilities, excluding derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
governments and agencies
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total trading liabilities, excluding derivative contracts
|
|
|
(26
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(26
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities interest and other
|
|
|
-
|
|
|
|
278
|
|
|
|
-
|
|
|
|
278
|
|
|
|
-
|
|
|
|
670
|
|
|
|
-
|
|
|
|
670
|
|
Long-term borrowings
|
|
|
(1,249
|
)
|
|
|
(47
|
)
|
|
|
-
|
|
|
|
(1,296
|
)
|
|
|
(1,782
|
)
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
(1,822
|
)
|
|
|
Net losses in principal transactions related to long-term
borrowings were primarily due to the narrowing of Merrill
Lynchs credit spreads on certain equity linked notes.
34
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 table shows the fair
value hierarchy for those assets and liabilities measured at
fair value on a non-recurring basis as of June 30, 2010 and
December 31, 2009, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Gains/(Losses)
|
|
Gains/(Losses)
|
|
|
Non-Recurring Basis
|
|
Three Months
|
|
Six Months
|
|
|
as of June 30, 2010
|
|
Ended
|
|
Ended
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
June 30, 2010
|
|
June 30, 2010
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities non-qualifying
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
96
|
|
|
$
|
96
|
|
|
$
|
(13
|
)
|
|
$
|
(13
|
)
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
536
|
|
|
|
2,201
|
|
|
|
2,737
|
|
|
|
(115
|
)
|
|
|
(192
|
)
|
Other assets
|
|
|
-
|
|
|
|
10
|
|
|
|
21
|
|
|
|
31
|
|
|
|
-
|
|
|
|
(5
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(22
|
)
|
|
|
(24
|
)
|
|
|
9
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 30, 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 June 30, 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 was 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.
35
Fair
Value Option Election
The fair value option election allows companies to irrevocably
elect fair value as the initial and subsequent measurement
attribute for certain financial assets and liabilities. Changes
in fair value for assets and liabilities for which the election
is made will be recognized in earnings as they occur. The fair
value option election is permitted on an instrument by
instrument basis at initial recognition of an asset or liability
or upon an event that gives rise to a new basis of accounting
for that instrument. As discussed above, certain of Merrill
Lynchs financial instruments are required to be accounted
for at 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 and
six months ended June 30, 2010 and June 30, 2009,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Changes in Fair Value For the Three
|
|
Changes in Fair Value For the Six
|
|
|
Months Ended June 30, 2010, for
|
|
Months Ended June 30, 2010, for
|
|
|
Items
|
|
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
|
|
$
|
(6
|
)
|
|
$
|
-
|
|
|
$
|
(6
|
)
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
1
|
|
Investment securities
|
|
|
-
|
|
|
|
49
|
|
|
|
49
|
|
|
|
-
|
|
|
|
46
|
|
|
|
46
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
66
|
|
|
|
66
|
|
|
|
-
|
|
|
|
94
|
|
|
|
94
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
20
|
|
|
|
-
|
|
|
|
20
|
|
Short-term borrowings
|
|
|
151
|
|
|
|
-
|
|
|
|
151
|
|
|
|
107
|
|
|
|
-
|
|
|
|
107
|
|
Other payables interest and other
|
|
|
-
|
|
|
|
(29
|
)
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
2
|
|
|
|
2
|
|
Long-term
borrowings(1)
|
|
|
2,582
|
|
|
|
47
|
|
|
|
2,629
|
|
|
|
2,481
|
|
|
|
(20
|
)
|
|
|
2,461
|
|
|
|
|
|
|
(1) |
|
Other revenues primarily
represent fair value changes on non-recourse long-term
borrowings issued by consolidated VIEs. |
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Changes in Fair Value For the Three
|
|
Changes in Fair Value For the Six
|
|
|
Months Ended June 30, 2009, for
|
|
Months Ended June 30, 2009, for
|
|
|
Items
|
|
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
|
|
$
|
(153
|
)
|
|
$
|
-
|
|
|
$
|
(153
|
)
|
|
$
|
(321
|
)
|
|
$
|
-
|
|
|
$
|
(321
|
)
|
Investment securities
|
|
|
374
|
|
|
|
(32
|
)
|
|
|
342
|
|
|
|
379
|
|
|
|
(135
|
)
|
|
|
244
|
|
Loans, notes and mortgages
|
|
|
-
|
|
|
|
1,050
|
|
|
|
1,050
|
|
|
|
-
|
|
|
|
638
|
|
|
|
638
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payables under repurchase agreements
|
|
|
92
|
|
|
|
-
|
|
|
|
92
|
|
|
|
184
|
|
|
|
-
|
|
|
|
184
|
|
Short-term borrowings
|
|
|
(230
|
)
|
|
|
-
|
|
|
|
(230
|
)
|
|
|
(246
|
)
|
|
|
6
|
|
|
|
(240
|
)
|
Other payables interest and other
|
|
|
-
|
|
|
|
289
|
|
|
|
289
|
|
|
|
-
|
|
|
|
681
|
|
|
|
681
|
|
Long-term
borrowings(1)
|
|
|
(5,431
|
)
|
|
|
(47
|
)
|
|
|
(5,478
|
)
|
|
|
(3,327
|
)
|
|
|
(40
|
)
|
|
|
(3,367
|
)
|
|
|
|
|
|
(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 commitments for which the fair value option
was elected was not material for the three and six months ended
June 30, 2010, and was primarily attributable to changes in
borrower-specific credit risk for the three and six months ended
June 30, 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 $262 million and
$459 million for the six months ended June 30, 2010
and June 30, 2009. The aggregate fair value of loans,
notes, and mortgages that were in non-accrual status was
$244 million and $459 million for the six months ended
June 30, 2010 and June 30, 2009. For the six months
ended June 30, 2010 and June 30, 2009, the unpaid
principal
37
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 $417 million and $486 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/(losses) for the three and six months ended June 30,
2010 and June 30, 2009 related to changes in
Merrill Lynchs credit spreads, the majority of the
gains/(losses) for the respective periods are offset by
(losses)/gains on derivatives that economically hedge these
borrowings and that are accounted for at fair value under
Derivatives Accounting. The changes in the fair value of
liabilities for which the fair value option election was made
that were attributable to the widening of Merrill Lynchs
credit spreads were gains of approximately $1.2 billion and
$1.4 billion for the three and six months ended
June 30, 2010, and losses of $3.6 billion and
$1.4 billion for the three and six months ended
June 30, 2009, respectively. Changes in Merrill Lynch
specific credit risk are derived by isolating fair value changes
due to changes in Merrill Lynchs credit spreads as
observed in the secondary cash market.
The fair value option election was also made for certain
non-recourse long-term borrowings and secured borrowings issued
by consolidated VIEs. The fair value of these borrowings is not
materially affected by changes in Merrill Lynchs
creditworthiness.
The following tables present the difference between fair values
and the aggregate contractual principal amounts of receivables
under resale agreements, receivables under securities borrowed
transactions, loans, notes, and mortgages and long-term
borrowings for which the fair value option election has been
made as of June 30, 2010 and December 31, 2009,
respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Principal
|
|
|
|
|
Fair Value
|
|
Amount
|
|
|
|
|
at
|
|
Due Upon
|
|
|
|
|
June 30, 2010
|
|
Maturity
|
|
Difference
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
45,030
|
|
|
$
|
44,710
|
|
|
$
|
320
|
|
Receivables under securities borrowed transactions
|
|
|
1,349
|
|
|
|
1,349
|
|
|
|
-
|
|
Loans, notes and mortgages
|
|
|
3,438
|
|
|
|
5,551
|
|
|
|
(2,113
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings(1)
|
|
|
39,588
|
|
|
|
47,579
|
|
|
|
(7,991
|
)
|
|
|
|
|
|
(1) |
|
The majority of the difference
relates to the impact of the widening of Merrill Lynchs
credit spreads and the change in fair value of non-recourse debt
issued by consolidated VIEs. |
38
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
|
|
Principal
|
|
|
|
|
Fair Value
|
|
Amount
|
|
|
|
|
at
|
|
Due Upon
|
|
|
|
|
December 31,
2009
|
|
Maturity
|
|
Difference
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables under resale agreements
|
|
$
|
41,740
|
|
|
$
|
41,454
|
|
|
$
|
286
|
|
Receivables under securities borrowed transactions
|
|
|
2,888
|
|
|
|
2,888
|
|
|
|
-
|
|
Loans, notes and mortgages
|
|
|
4,649
|
|
|
|
7,236
|
|
|
|
(2,587
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings(1)
|
|
|
47,040
|
|
|
|
50,543
|
|
|
|
(3,503
|
)
|
|
|
|
|
|
(1) |
|
The majority of the difference
relates to the impact of the widening of Merrill Lynchs
credit spreads, the change in fair value of non-recourse debt,
and zero coupon notes issued at a substantial discount from the
principal amount. |
Note 5. Fair
Value of Financial Instruments
The fair values of financial instruments have been derived, in
part, by managements assumptions, the estimated amount and
timing of future cash flows and estimated discount rates.
Different assumptions could significantly affect these estimated
fair values. Accordingly, the net realizable values could be
materially different from the estimates presented below. In
addition, the estimates are only indicative of the value of
individual financial instruments and should not be considered an
indication of the fair value of Merrill Lynch.
The following disclosures represent financial instruments for
which the ending balances at June 30, 2010 and
December 31, 2009 are not carried at fair value in their
entirety on Merrill Lynchs Condensed Consolidated Balance
Sheets.
Short-term
Financial Instruments
The carrying value of short-term financial instruments,
including cash and cash equivalents, cash and securities
segregated for regulatory purposes or deposited with clearing
organizations, certain securities financing transactions,
customer and broker-dealer receivables and payables, and
commercial paper and other short-term borrowings, approximates
the fair value of these instruments. These financial instruments
generally expose Merrill Lynch to limited credit risk and have
no stated maturities or have short-term maturities and carry
interest rates that approximate market interest rates.
Loans,
Notes and Mortgages
Fair values were generally determined by discounting both
principal and interest cash flows expected to be collected using
an observable discount rate for similar instruments with
adjustments that Merrill Lynch believes a market
participant would consider in determining fair value. Merrill
Lynch estimates the cash flows expected to be collected using
internal credit risk, interest rate and prepayment risk models
that incorporate its best estimate of current key assumptions,
such as default rates, loss severity and prepayment speeds for
the life of the loan. Merrill Lynch made the fair value option
election for certain loans and loan commitments. See Note 4
for additional information on loans for which Merrill Lynch
made the fair value option election.
39
Deposits
The fair value for certain deposits with stated maturities was
calculated by discounting contractual cash flows using current
market rates for instruments with similar maturities. For
deposits with no stated maturities, the carrying amount was
considered to approximate fair value and does not take into
account the significant value of the cost advantage and
stability of Merrill Lynchs long-term relationships with
depositors.
Long-term
Borrowings
Merrill Lynch uses quoted market prices for its long-term
borrowings when available. When quoted market prices are not
available, fair value is estimated based on current market
interest rates and credit spreads for Merrill Lynch debt with
similar maturities. Merrill Lynch made the fair value option
election for certain long-term borrowings, including structured
notes. See Note 4 for additional information on long-term
borrowings for which Merrill Lynch made the fair value option
election.
The book and fair values of certain financial instruments at
June 30, 2010 and December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
Book Value
|
|
Fair Value
|
|
Book Value
|
|
Fair Value
|
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, notes and
mortgages(1)
|
|
$
|
32,576
|
|
|
$
|
32,458
|
|
|
$
|
37,663
|
|
|
$
|
37,715
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
12,961
|
|
|
|
12,961
|
|
|
|
15,187
|
|
|
|
15,187
|
|
Long-term
borrowings(2)
|
|
|
135,297
|
|
|
|
141,512
|
|
|
|
154,951
|
|
|
|
162,645
|
|
|
|
|
|
|
(1) |
|
Loans are presented net of
allowance for loan losses. The fair value is determined based on
the present value of future cash flows using credit spreads or
risk adjusted rates of return that a buyer of the portfolio
would require. Merrill Lynch expects to collect the principal
cash flows underlying the book values as well as the related
interest cash flows. |
(2) |
|
Includes junior subordinated
notes (related to trust preferred securities). |
A derivative is an instrument whose value is derived from an
underlying instrument or index, such as interest rates, equity
security prices, currencies, commodity prices or credit spreads.
Derivatives include futures, forwards, swaps, option contracts,
and other financial instruments with similar characteristics.
Derivative contracts often involve future commitments to
exchange interest payment streams or currencies based on a
notional or contractual amount (e.g., interest rate swaps or
currency forwards) or to purchase or sell other financial
instruments at specified terms on a specified date (e.g.,
options to buy or sell securities or currencies).
Derivatives Accounting establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts
(embedded derivatives) and for hedging activities.
Derivatives Accounting requires that an entity recognize all
derivatives as either assets or liabilities and measure those
instruments at fair value. The fair value of all derivatives is
recorded on a
net-by-counterparty
basis on the Condensed Consolidated Balance Sheets where
Merrill Lynch believes a legal right of setoff exists under
an enforceable netting agreement. All
40
derivatives, including bifurcated embedded derivatives within
structured notes, are reported on the Condensed Consolidated
Balance Sheets as trading assets and liabilities.
The accounting for changes in fair value of a derivative
instrument depends on its intended use and if it is designated
and qualifies as an accounting hedging instrument under
Derivatives Accounting.
Trading
derivatives
Merrill Lynch enters into derivatives to facilitate client
transactions, for proprietary trading and financing purposes,
and to manage risk exposures arising from trading assets and
liabilities. Changes in fair value for these derivatives are
reported in current period earnings as principal transactions
revenues.
Derivatives
that contain a significant financing element
In the ordinary course of trading activities, Merrill Lynch
enters into certain transactions that are documented as
derivatives where a significant cash investment is made by one
party. Certain derivative instruments that contain a significant
financing element at inception and where Merrill Lynch is deemed
to be the borrower are included in financing activities in the
Condensed Consolidated Statements of Cash Flows. The cash flows
from all other derivative transactions that do not contain a
significant financing element at inception are included in
operating activities.
Non-trading
derivatives
Merrill Lynch also enters into derivatives in order to manage
risk exposures arising from assets and liabilities not carried
at fair value as follows:
|
|
1. |
Merrill Lynchs debt was issued in a variety of maturities
and currencies to achieve the lowest cost financing possible.
Merrill Lynch enters into derivative transactions to hedge these
liabilities. Derivatives used most frequently include swap
agreements that:
|
|
|
|
|
|
Convert fixed-rate interest payments into variable-rate interest
payments;
|
|
|
|
Change the underlying interest rate basis or reset
frequency; and
|
|
|
|
Change the settlement currency of a debt instrument.
|
Changes in the fair value of interest rate derivatives are
reported in interest expense when hedge accounting is applied;
otherwise changes in fair value are reported in other revenue.
Changes in the fair value of foreign currency derivatives are
reported in other revenue.
|
|
2.
|
Merrill Lynch uses foreign-exchange forward contracts,
foreign-exchange options, and currency swaps to hedge its net
investments in foreign operations, as well as other foreign
currency exposures (e.g.,
non-U.S. dollar
denominated debt and expenses). These derivatives are used to
mitigate the impact of changes in exchange rates. Changes in the
fair value of these derivatives are reported in other revenue,
unless net investment hedge accounting is applied.
|
|
3.
|
Merrill Lynch enters into futures, swaps, options and forward
contracts to manage the price risk of certain commodity
inventory and forecasted commodity purchases and sales. Changes
in fair value of these derivatives are reported in principal
transaction revenues, unless cash flow hedge accounting is
applied.
|
41
|
|
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 three and six months ended June 30, 2010
and other revenues for the three and six months ended
June 30, 2009.
|
Merrill Lynch formally assesses, both at the inception of the
hedge and on an ongoing basis, whether the hedging derivatives
are highly effective in offsetting changes in fair value or cash
flows of hedged items. Merrill Lynch uses regression analysis at
the hedges inception and for each reporting period
thereafter to assess whether the derivative used in its hedging
transaction is expected to be and has been highly effective in
offsetting changes in the fair value or cash flows of the hedged
item. When assessing hedge effectiveness on interest rate hedges
and fair value hedges of commodity price risk, there are no
attributes of the derivatives used to hedge the fair value
exposure that are excluded from the assessment. For cash flow
hedges of commodity price risk, the difference between the spot
rate and the contracted forward rate which represents the time
value of money is excluded from the assessment of hedge
effectiveness and is recorded in principal transactions
revenues. When it is determined that a derivative is not highly
effective as a hedge, Merrill Lynch discontinues hedge
accounting.
42
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 June 30:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) recognized in income on the derivative
|
|
Interest expense
|
|
$
|
649
|
|
|
$
|
(2,155
|
)
|
Gain/(loss) recognized in income on the long-term
borrowing(1)
|
|
Interest expense
|
|
|
(917
|
)
|
|
|
1,892
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Interest expense
|
|
|
(268
|
)
|
|
|
(263
|
)
|
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) recognized in income on the derivative
|
|
Interest expense
|
|
|
435
|
|
|
|
(2,525
|
)
|
Gain/(loss) recognized in income on the long-term
borrowing(1)
|
|
Interest expense
|
|
|
(914
|
)
|
|
|
2,137
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Interest expense
|
|
|
(479
|
)
|
|
|
(388
|
)
|
As of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying value of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
5,150
|
|
|
|
3,362
|
|
|
|
Trading liabilities
|
|
|
1,537
|
|
|
|
101
|
|
Notional amount of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
|
47,858
|
|
|
|
54,954
|
|
in a liability position
|
|
|
|
|
11,722
|
|
|
|
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 June 30:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) recognized in income on the derivative
|
|
Principal transactions
|
|
$
|
(16
|
)
|
|
$
|
5
|
|
Gain/(loss) recognized in income on the commodity inventory
|
|
Principal transactions
|
|
|
15
|
|
|
|
-
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Principal transactions
|
|
|
(1
|
)
|
|
|
5
|
|
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) recognized in income on the derivative
|
|
Principal transactions
|
|
|
41
|
|
|
|
60
|
|
Gain/(loss) recognized in income on the commodity inventory
|
|
Principal transactions
|
|
|
(46
|
)
|
|
|
(57
|
)
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Principal transactions
|
|
|
(5
|
)
|
|
|
3
|
|
As of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying value of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
104
|
|
|
|
78
|
|
|
|
Trading liabilities
|
|
|
1
|
|
|
|
4
|
|
Notional amount of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
|
292
|
|
|
|
286
|
|
in a liability position
|
|
|
|
|
2
|
|
|
|
34
|
|
|
|
43
Cash
flow hedges of commodity price risk on forecasted purchases and
sales
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Account location
|
|
2010
|
|
2009
|
|
|
For the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) on the derivative deferred in equity
|
|
Accumulated other
comprehensive income
|
|
$
|
(5
|
)
|
|
$
|
15
|
|
Gain/(loss) reclassified into earnings in the current period
|
|
Principal transactions
|
|
|
10
|
|
|
|
2
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Principal transactions
|
|
|
2
|
|
|
|
-
|
|
Amount that is expected to be reclassified into earnings in the
next 12 months
|
|
Principal transactions
|
|
|
12
|
|
|
|
18
|
|
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) on the derivative deferred in equity
|
|
Accumulated other
|
|
|
|
|
|
|
|
|
|
|
comprehensive income
|
|
|
27
|
|
|
|
63
|
|
Gain/(loss) reclassified into earnings in the current period
|
|
Principal transactions
|
|
|
13
|
|
|
|
5
|
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Principal transactions
|
|
|
2
|
|
|
|
-
|
|
Amount that is expected to be reclassified into earnings in the
next 12 months
|
|
Principal transactions
|
|
|
12
|
|
|
|
18
|
|
As of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying value of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading assets
|
|
|
106
|
|
|
|
10
|
|
|
|
Trading liabilities
|
|
|
5
|
|
|
|
5
|
|
Notional amount of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
|
331
|
|
|
|
92
|
|
in a liability position
|
|
|
|
|
50
|
|
|
|
67
|
|
|
|
44
Net
investment hedges of foreign operations
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Account location
|
|
2010
|
|
2009
|
|
|
For the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) on the derivative and non-derivative hedges deferred
in equity
|
|
Accumulated other
comprehensive income
|
|
$
|
277
|
|
|
$
|
(1,979
|
)
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Other revenue
|
|
|
-
|
|
|
|
-
|
|
Gain/(loss) recognized in income from the unused portion (time
value) of the hedging derivative
|
|
Other revenue
|
|
|
-
|
|
|
|
(28
|
)
|
|
|
Interest expense
|
|
|
(52
|
)
|
|
|
-
|
|
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Gain/(loss) on the derivative and non-derivative hedges deferred
in equity
|
|
Accumulated other
comprehensive income
|
|
|
847
|
|
|
|
(1,261
|
)
|
Gain/(loss) recognized in income due to hedge ineffectiveness
|
|
Other revenue
|
|
|
-
|
|
|
|
-
|
|
Gain/(loss) recognized in income from the unused portion (time
value) of the hedging derivative
|
|
Other revenue
|
|
|
-
|
|
|
|
(92
|
)
|
|
|
Interest expense
|
|
|
(89
|
)
|
|
|
-
|
|
As of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Carrying value of hedging derivatives
|
|
Trading assets
|
|
|
340
|
|
|
|
353
|
|
|
|
Trading liabilities
|
|
|
387
|
|
|
|
277
|
|
Carrying value of non-derivative hedges
|
|
Long-term borrowings
|
|
|
513
|
|
|
|
598
|
|
Notional amount of hedging derivatives
|
|
|
|
|
|
|
|
|
|
|
in an asset position
|
|
|
|
|
12,977
|
|
|
|
16,531
|
|
in a liability position
|
|
|
|
|
10,590
|
|
|
|
6,098
|
|
|
|
Net gains/(losses) on economic hedges
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions)
|
|
|
Account location
|
|
2010
|
|
2009
|
|
|
For the three months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk
|
|
Interest expense
|
|
$
|
413
|
|
|
$
|
(509
|
)
|
Foreign currency risk
|
|
Other revenue
|
|
|
(3,036
|
)
|
|
|
(1,993
|
)
|
Credit risk
|
|
Other revenue
|
|
|
18
|
|
|
|
(221
|
)
|
For the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Interest rate risk
|
|
Interest expense
|
|
|
469
|
|
|
|
(718
|
)
|
Foreign currency risk
|
|
Other revenue
|
|
|
(5,730
|
)
|
|
|
(1,460
|
)
|
Credit risk
|
|
Other revenue
|
|
|
6
|
|
|
|
(152
|
)
|
|
|
The amounts in the table above 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 economically hedge
long-term debt. 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.
45
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.
The following tables identify the primary risk for derivative
instruments at June 30, 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 June 30, 2010
|
|
|
Contract/
|
|
Trading Assets-
|
|
Contract/
|
|
Trading Liabilities-
|
|
|
Notional(1)
|
|
Derivative Contracts
|
|
Notional(1)
|
|
Derivative Contracts
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
$
|
8,853,051
|
|
|
$
|
570,189
|
|
|
$
|
8,745,406
|
|
|
$
|
563,444
|
|
Futures and forwards
|
|
|
1,991,244
|
|
|
|
2,281
|
|
|
|
2,087,228
|
|
|
|
2,554
|
|
Written options
|
|
|
-
|
|
|
|
-
|
|
|
|
1,654,505
|
|
|
|
50,866
|
|
Purchased options
|
|
|
1,413,829
|
|
|
|
52,137
|
|
|
|
-
|
|
|
|
-
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps
|
|
|
85,591
|
|
|
|
10,012
|
|
|
|
109,555
|
|
|
|
13,561
|
|
Spot, futures and forwards
|
|
|
150,021
|
|
|
|
7,486
|
|
|
|
133,251
|
|
|
|
7,137
|
|
Written options
|
|
|
-
|
|
|
|