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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
X
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
OR
     
  
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from           to          
 
Commission file number: 1-7182
 
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
 
     
Delaware
  13-2740599
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)
   
     
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina
 

28255
(Address of principal executive offices)
  (Zip Code)
 
(704) 386-5681
Registrant’s telephone number, including area code:
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
X     YES             NO
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
X     YES             NO
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer    Accelerated filer    Non-accelerated filer X Smaller reporting company   
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
       YES      X     NO
 
As of the close of business on November 3, 2011, there were 1,000 shares of Common Stock outstanding, all of which were held by Bank of America Corporation.
 
The registrant is a wholly-owned subsidiary of Bank of America Corporation and meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format as permitted by Instruction H(2).


 

 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
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PART I — Financial Information
 
Item 1.  Financial Statements (Unaudited)
 
Merrill Lynch & Co., Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
 
                 
    Three Months Ended
  Three Months Ended
(dollars in millions)   September 30, 2011   September 30, 2010
 
Revenues
               
Principal transactions
  $ 2,781     $ 1,243  
Commissions
    1,441       1,351  
Managed account and other fee-based revenues
    1,354       1,114  
Investment banking
    1,016       1,326  
Earnings from equity method investments
    70       281  
Other revenues
    (899 )     478  
Other-than-temporary impairment losses on available-for-sale debt securities:
               
Total other-than-temporary impairment losses
    (12 )     (45 )
Less: Portion of other-than-temporary impairment losses recognized in other comprehensive income
    7       3  
                 
Subtotal
    5,758       5,751  
Interest and dividend revenues
    2,314       2,245  
Less interest expense
    2,202       2,260  
                 
Net interest income (expense)
    112       (15 )
                 
Revenues, net of interest expense
    5,870       5,736  
                 
Non-interest expenses
               
Compensation and benefits
    3,638       3,507  
Communications and technology
    432       493  
Occupancy and related depreciation
    385       351  
Brokerage, clearing, and exchange fees
    279       227  
Advertising and market development
    122       114  
Professional fees
    266       265  
Office supplies and postage
    31       38  
Provision for representations and warranties
    17       34  
Other
    1,090       973  
                 
Total non-interest expenses
    6,260       6,002  
                 
Pre-tax loss
    (390 )     (266 )
Income tax (benefit) expense
    (523 )     114  
                 
Net earnings (loss)
  $ 133     $ (380 )
                 
Preferred stock dividends
    -       38  
                 
Net earnings (loss) applicable to common stockholder
  $ 133     $ (418 )
                 
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings (Loss) (Unaudited)
 
                 
    Nine Months Ended
  Nine Months Ended
(dollars in millions)   September 30, 2011   September 30, 2010
 
Revenues
               
Principal transactions
  $ 6,125     $ 7,381  
Commissions
    4,478       4,317  
Managed account and other fee-based revenues
    3,976       3,328  
Investment banking
    4,162       3,800  
Earnings from equity method investments
    328       658  
Other revenues
    2,337       2,758  
Other-than-temporary impairment losses on available-for-sale debt securities:
               
Total other-than-temporary impairment losses
    (59 )     (168 )
Less: Portion of other-than-temporary impairment losses recognized in other comprehensive income
    10       3  
                 
Subtotal
    21,357       22,077  
Interest and dividend revenues
    6,220       6,985  
Less interest expense
    6,945       7,235  
                 
Net interest expense
    (725 )     (250 )
                 
Revenues, net of interest expense
    20,632       21,827  
                 
Non-interest expenses
               
Compensation and benefits
    12,146       11,593  
Communications and technology
    1,338       1,465  
Occupancy and related depreciation
    1,056       1,053  
Brokerage, clearing, and exchange fees
    882       781  
Advertising and market development
    358       313  
Professional fees
    718       660  
Office supplies and postage
    95       118  
Provision for representations and warranties
    2,736       (145 )
Other
    3,535       2,177  
                 
Total non-interest expenses
    22,864       18,015  
                 
Pre-tax (loss) earnings
    (2,232 )     3,812  
Income tax (benefit) expense
    (1,329 )     1,286  
                 
Net (loss) earnings
  $ (903 )   $ 2,526  
                 
Preferred stock dividends
    -       114  
                 
Net (loss) earnings applicable to common stockholder
  $ (903 )   $ 2,412  
                 
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)
 
                 
(dollars in millions, except per share amounts)   September 30, 2011   December 31, 2010
 
ASSETS
                 
Cash and cash equivalents
  $ 13,301     $ 17,220  
                 
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
    13,172       12,424  
                 
Securities financing transactions
               
Receivables under resale agreements (includes $89,119 in 2011 and $74,255 in 2010 measured at fair value in accordance with the fair value option election)
    175,640       138,219  
Receivables under securities borrowed transactions (includes $1,543 in 2011 and $1,672 in 2010 measured at fair value in accordance with the fair value option election)
    61,362       60,458  
                 
      237,002       198,677  
                 
Trading assets, at fair value (includes securities pledged as collateral that can be sold or repledged of $42,251 in 2011 and $33,933 in 2010):
               
Derivative contracts
    39,233       39,371  
Equities and convertible debentures
    25,066       34,204  
Non-U.S. governments and agencies
    28,345       22,248  
Corporate debt and preferred stock
    20,272       27,703  
Mortgages, mortgage-backed, and asset-backed
    7,240       10,994  
U.S. Government and agencies
    43,566       41,378  
Municipals, money markets, physical commodities and other
    15,089       14,759  
                 
      178,811       190,657  
                 
Investment securities (includes $201 in 2011 and $310 in 2010 measured at fair value in accordance with the fair value option election)
    8,031       17,769  
                 
Securities received as collateral, at fair value
    12,558       20,363  
                 
Receivables from Bank of America
    55,658       60,655  
                 
Other receivables
               
Customers (net of allowance for doubtful accounts of $15 in 2011 and $8 in 2010)
    23,253       22,080  
Brokers and dealers
    10,378       16,483  
Interest and other
    12,504       10,633  
                 
      46,135       49,196  
                 
                 
Loans, notes, and mortgages (net of allowances for loan losses of $90 in 2011 and $170 in 2010) (includes $2,399 in 2011 and $3,190 in 2010 measured at fair value in accordance with the fair value option election)
    21,916       25,803  
                 
Equipment and facilities, net
    1,471       1,712  
                 
Goodwill and intangible assets
    9,482       9,714  
                 
Other assets
    17,745       17,436  
                 
                 
Total Assets
  $ 615,282     $ 621,626  
                 
                 
Assets of Consolidated VIEs Included in Total Assets Above (pledged as collateral)
               
                 
Trading assets, excluding derivative contracts
  $ 8,766     $ 10,838  
Derivative contracts
    -       41  
Investment securities
    264       309  
Loans, notes, and mortgages (net)
    108       221  
Other assets
    1,511       1,597  
                 
                 
Total Assets of Consolidated VIEs
  $ 10,649     $ 13,006  
                 


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
                 
(dollars in millions, except per share amounts)   September 30, 2011   December 31, 2010
 
LIABILITIES
               
                 
Securities financing transactions
               
Payables under repurchase agreements (includes $36,943 in 2011 and $37,394 in 2010 measured at fair value in accordance with the fair value option election)
  $ 203,220     $ 183,758  
Payables under securities loaned transactions
    14,795       15,251  
                 
      218,015       199,009  
                 
                 
Short-term borrowings (includes $5,527 in 2011 and $6,472 in 2010 measured at fair value in accordance with the fair value option election)
    7,104       15,248  
                 
Deposits
    12,277       12,826  
                 
Trading liabilities, at fair value
               
Derivative contracts
    29,538       32,197  
Equities and convertible debentures
    16,602       14,026  
Non-U.S. governments and agencies
    16,702       15,705  
Corporate debt and preferred stock
    9,655       9,500  
U.S. Government and agencies
    16,677       24,747  
Municipals, money markets and other
    473       571  
                 
      89,647       96,746  
                 
                 
Obligation to return securities received as collateral, at fair value
    12,558       20,363  
Payables to Bank of America
    33,587       23,021  
                 
Other payables
               
Customers
    42,430       39,045  
Brokers and dealers
    11,211       12,895  
Interest and other (includes $189 in 2011 and $165 in 2010 measured at fair value in accordance with the fair value option election)
    19,888       19,900  
                 
      73,529       71,840  
                 
                 
Long-term borrowings (includes $31,021 in 2011 and $39,214 in 2010 measured at fair value in accordance with the fair value option election)
    114,917       128,851  
Junior subordinated notes (related to trust preferred securities)
    3,594       3,576  
                 
Total Liabilities
    565,228       571,480  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDER’S EQUITY
               
                 
Common stock (par value $1.331/3 per share; authorized: 3,000,000,000 shares; issued: 1,000 shares)
    -       -  
Paid-in capital
    41,257       40,416  
Accumulated other comprehensive loss (net of tax)
    (284 )     (254 )
Retained earnings
    9,081       9,984  
                 
Total Stockholder’s Equity
    50,054       50,146  
                 
Total Liabilities and Stockholder’s Equity
  $ 615,282     $ 621,626  
                 
                 
Liabilities of Consolidated VIEs Included in Total Liabilities Above
               
Short-term borrowings
  $ 5,314     $ 4,642  
Derivative contracts
    4       1  
Payables to Bank of America
    13       2  
Other payables
    180       53  
Long-term borrowings
    5,617       6,674  
                 
Total Liabilities of Consolidated VIEs
  $ 11,128     $ 11,372  
                 
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
                 
    Nine Months Ended
  Nine Months Ended
(dollars in millions)   September 30, 2011   September 30, 2010
 
Cash flows from operating activities:
               
Net (loss) earnings
  $ (903 )   $ 2,526  
Adjustments to reconcile net earnings to cash provided by operating activities
               
Provision for representations and warranties
    2,736       (145 )
Depreciation and amortization
    562       692  
Share-based compensation expense
    1,578       1,039  
Deferred taxes
    (204 )     673  
Earnings from equity method investments
    (328 )     (306 )
Other
    2,435       1,744  
Changes in operating assets and liabilities:
               
Trading assets
    11,846       (17,876 )
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
    (748 )     2,184  
Receivables from Bank of America
    4,997       (2,674 )
Receivables under resale agreements
    (37,421 )     (75,377 )
Receivables under securities borrowed transactions
    (904 )     5,632  
Customer receivables
    (1,180 )     12,191  
Brokers and dealers receivables
    6,106       4,999  
Proceeds from loans, notes, and mortgages held for sale
    3,928       4,989  
Other changes in loans, notes, and mortgages held for sale
    (2,428 )     (2,559 )
Trading liabilities
    (7,129 )     31,664  
Payables under repurchase agreements
    19,462       43,268  
Payables under securities loaned transactions
    (456 )     (8,216 )
Payables to Bank of America
    10,566       (2,209 )
Customer payables
    3,385       385  
Brokers and dealers payables
    (1,684 )     (4,451 )
Other, net
    (8,159 )     9,933  
                 
Cash provided by operating activities
    6,057       8,106  
                 
Cash flows from investing activities:
               
Proceeds from (payments for):
               
Maturities of available-for-sale securities
    1,442       1,201  
Sales of available-for-sale securities
    3,876       14,966  
Purchases of available-for-sale securities
    (1,430 )     (771 )
Maturities of held-to-maturity securities
    250       -  
Equipment and facilities, net
    (89 )     (294 )
Loans, notes, and mortgages held for investment
    2,111       2,656  
Other investments
    5,480       2,459  
                 
Cash provided by investing activities
    11,640       20,217  
                 
Cash flows from financing activities:
               
Proceeds from (payments for):
               
Commercial paper and short-term borrowings
    (8,144 )     (5,031 )
Issuance and resale of long-term borrowings
    7,657       6,440  
Settlement and repurchases of long-term borrowings
    (20,610 )     (29,452 )
Deposits
    (549 )     (1,295 )
Derivative financing transactions
    30       (1 )
Dividends
    -       (114 )
                 
Cash used for financing activities
    (21,616 )     (29,453 )
                 
Decrease in cash and cash equivalents
    (3,919 )     (1,130 )
Cash and cash equivalents, beginning of period
    17,220       15,142  
                 
Cash and cash equivalents, end of period
  $ 13,301     $ 14,012  
                 
Supplemental Disclosure of Cash Flow Information:
               
Income taxes paid
  $ 147     $ 2,460  
Interest paid
    5,716       5,471  
Non-cash investing and financing activities:
 
During the nine months ended September 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 variable interest entities.
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
                                 
    Three Months Ended
  Nine Months Ended
  Three Months Ended
  Nine Months Ended
(dollars in millions)   September 30, 2011   September 30, 2011   September 30, 2010   September 30, 2010
 
Net earnings (loss)
  $ 133     $ (903 )   $ (380 )   $ 2,526  
Other comprehensive (loss) income, net of tax:
                               
Foreign currency translation adjustment
    (27 )     (25 )     28       (30 )
Net unrealized (loss) gain on investment securities available-for-sale
    (15 )     (3 )     68       (49 )
Net deferred gain (loss) on cash flow hedges
    2       (5 )     10       18  
Defined benefit pension and postretirement plans
    (1 )     3       2       5  
                                 
Total other comprehensive (loss) income, net of tax
    (41 )     (30 )     108       (56 )
                                 
Comprehensive income (loss)
  $ 92     $ (933 )   $ (272 )   $ 2,470  
                                 
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2011
 
Note 1.  Summary of Significant Accounting Policies
 
Merrill Lynch & Co. Inc. (“ML & Co.”) and together with its subsidiaries (“Merrill Lynch”), provides investment, financing and other related services to individuals and institutions on a global basis through its broker, dealer, banking and other financial services subsidiaries. On January 1, 2009, ML & Co. was acquired by Bank of America Corporation (“Bank of America”) in exchange for common and preferred stock with a value of $29.1 billion. ML & Co. is a wholly-owned subsidiary of Bank of America.
 
Merger with Banc of America Securities Holdings Corporation (“BASH”)
 
On November 1, 2010, ML & Co. merged with BASH, a wholly-owned subsidiary of Bank of America, with ML & Co. as the surviving corporation in the merger. In addition, as a result of the BASH merger, Banc of America Securities LLC (“BAS”), a wholly-owned broker-dealer subsidiary of BASH, became a wholly-owned broker-dealer subsidiary of ML & Co. Subsequently, on November 1, 2010, BAS was merged into Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a wholly-owned broker-dealer subsidiary of ML & Co., with MLPF&S as the surviving corporation in the merger. In accordance with Accounting Standards Codification (“ASC”) 805-10, Business Combinations (“Business Combinations Accounting”), Merrill Lynch’s Condensed Consolidated Financial Statements for the three and nine month periods ended September 30, 2011 and September 30, 2010 include the historical results of BASH and subsidiaries as if the BASH merger had occurred as of January 1, 2009, the date at which both entities were first under the common control of Bank of America. Merrill Lynch has recorded the assets and liabilities acquired in connection with the BASH merger at their historical carrying values.
 
Basis of Presentation
 
The Condensed Consolidated Financial Statements include the accounts of Merrill Lynch. The Condensed Consolidated Financial Statements are presented in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). Intercompany transactions and balances within Merrill Lynch have been eliminated. Transactions and balances with Bank of America have not been eliminated. The interim Condensed Consolidated Financial Statements are unaudited; however, all adjustments for a fair presentation of the Condensed Consolidated Financial Statements have been included.
 
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in Merrill Lynch’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Annual Report”). The nature of Merrill Lynch’s business is such that the results of any interim period are not necessarily indicative of results for a full year. Certain prior-period amounts have been reclassified to conform to the current period presentation.
 
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”) or as a variable interest entity (“VIE”).
 
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. On January 1, 2010, Merrill Lynch adopted accounting guidance on consolidation of VIEs,


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which has been deferred 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.
 
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 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 the ability to exercise significant influence over operating and financing decisions of 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 VIEs. 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 Consolidation Accounting guidance, Merrill Lynch is considered the primary beneficiary when it has a controlling financial interest in a VIE. Merrill Lynch has a controlling financial interest when it has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. 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.
 
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 by holding notes or other debt instruments issued by the securitization vehicle. 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 other proceeds received.
 
Revenue Recognition
 
Principal transactions revenue includes 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.


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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.
 
Earnings from equity method investments include Merrill Lynch’s pro rata share of income and losses associated with investments accounted for under the equity method of accounting.
 
Other revenues include gains (losses) on investment securities, including sales and other-than-temporary-impairment (“OTTI”) 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 received and paid, and dividends received 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 as interest revenue or interest expense, as applicable.
 
Use of Estimates
 
In presenting the Condensed Consolidated Financial Statements, management makes estimates including the following:
 
•  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;
 
•  Determination of the liability for representations and warranties made in connection with the sales of residential mortgage and home equity loans;
 
•  Determination of whether VIEs should be consolidated;
 
•  The ability to realize deferred taxes and the recognition and measurement of uncertain tax positions;
 
•  The carrying amount of goodwill and intangible assets;
 
•  The amortization period of intangible assets with definite lives;
 
•  Incentive-based compensation accruals and valuation of share-based payment compensation arrangements; and


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•  Other matters that affect the reported amounts and disclosure of contingencies in the Condensed Consolidated Financial Statements.
 
Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have a material impact on the Condensed Consolidated Financial Statements, and it is possible that such changes could occur in the near term. A discussion of certain areas in which estimates are a significant component of the amounts reported in the Condensed Consolidated Financial Statements follows:
 
Fair Value Measurement
 
Merrill Lynch accounts for a significant portion of its financial instruments at fair value or considers fair value in their measurement. Merrill Lynch accounts for certain financial assets and liabilities at fair value under various accounting literature, including ASC 320, Investments — Debt and Equity Securities (“Investment Accounting”), ASC 815, Derivatives and Hedging (“Derivatives Accounting”), and the fair value option election in accordance with ASC 825-10-25, Financial Instruments — Recognition (the “fair value option election”). Merrill Lynch also accounts for certain assets at fair value under applicable industry guidance, namely ASC 940, Financial Services — Broker and Dealers (“Broker-Dealer Guide”) and ASC 946, Financial Services — Investment Companies (“Investment Company Guide”).
 
ASC 820, Fair Value Measurements and Disclosures (“Fair Value Accounting”) defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
 
Fair values for over-the-counter (“OTC”) derivative financial instruments, principally forwards, options, and swaps, represent the present value of amounts estimated to be received from or paid to a marketplace participant in settlement of these instruments (i.e., the amount Merrill Lynch would expect to receive in a derivative asset assignment or would expect to pay to have a derivative liability assumed). These derivatives are valued using pricing models based on the net present value of estimated future cash flows and directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services, while taking into account the counterparty’s creditworthiness, or Merrill Lynch’s own creditworthiness, as appropriate. Determining the fair value for OTC derivative contracts can require a significant level of estimation and management judgment.
 
New and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation often incorporate significant estimates and assumptions that market participants would use in pricing the instrument, which may impact the results of operations reported in the Condensed Consolidated Financial Statements. For instance, on long-dated and illiquid contracts extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. This enables Merrill Lynch to mark to fair value all positions consistently when only a subset of prices are directly observable. Values for OTC derivatives are verified using observed information about the costs of hedging the risk and other trades in the market. As the markets for these products develop, Merrill Lynch continually refines its pricing models to correlate more closely to the market price of these instruments. The recognition of significant inception gains and losses that incorporate unobservable inputs is reviewed by management to ensure such gains and losses are derived from observable inputs and/or incorporate reasonable assumptions about the unobservable component, such as implied bid-offer adjustments.
 
Certain financial instruments recorded at fair value are initially measured using mid-market prices which results in gross long and short positions valued at the same pricing level prior to the application of position netting. The resulting net positions are then adjusted to fair value representing the exit price as defined in Fair Value Accounting. The significant adjustments include liquidity and counterparty credit risk.


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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 (i.e., debit valuation adjustment or “DVA”). Merrill Lynch’s DVA is measured in the same manner as third party counterparty credit risk. The impact of Merrill Lynch’s DVA is incorporated into the fair value of instruments such as OTC derivative contracts even when credit risk is not readily observable in the instrument. OTC derivative liabilities are valued based on the net counterparty exposure as described above.
 
Legal and Representation and Warranty Reserves
 
Merrill Lynch is a party in various actions, some of which involve claims for substantial amounts. Amounts are accrued for the financial resolution of claims that have either been asserted or are deemed probable of assertion if, in the opinion of management, it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many cases, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no accrual is made until that time. Accruals are subject to significant estimation by management, with input from any outside counsel handling the matter.
 
In addition, Merrill Lynch and certain of its subsidiaries made various representations and warranties in connection with the sale of residential mortgage and home equity loans. Breaches of these representations and warranties may result in the requirement to repurchase mortgage loans or to otherwise make whole or provide other remedies. 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


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Merrill Lynch and Bank of America, as certain tax attributes such as U.S. net operating losses (“NOLs”), U.S. capital loss carryforwards and foreign tax credit carryforwards can be utilized by Bank of America in certain income tax returns, 2) tax carryforward periods, and 3) tax planning strategies and other factors of the legal entities, such as the intercompany tax-allocation policy. Included within Merrill Lynch’s net deferred tax assets are carryforward amounts generated in the U.S. and the U.K. that are deductible in the future as NOLs. Merrill Lynch has concluded that these deferred tax assets are more-likely-than-not to be fully utilized prior to expiration, based on the projected level of future taxable income of Merrill Lynch and Bank of America, which is relevant due to the intercompany tax-allocation policy. For this purpose, future taxable income was projected based on forecasts, historical earnings after adjusting for the past market disruptions and the anticipated impact of the differences between pre-tax earnings and taxable income.
 
Merrill Lynch recognizes and measures its unrecognized tax benefits in accordance with Income Tax Accounting. Merrill Lynch estimates the likelihood, based on their technical merits, that tax positions will be sustained upon examination considering the facts and circumstances and information available at the end of each period. Merrill Lynch adjusts the level of unrecognized tax benefits when there is more information available, or when an event occurs requiring a change. In accordance with Bank of America’s policy, any new or subsequent change in an unrecognized tax benefit related to a Bank of America state consolidated, combined or unitary return in which Merrill Lynch is a member will generally not be reflected in Merrill Lynch’s balance sheet. However, upon Bank of America’s resolution of the item, any material impact determined to be attributable to Merrill Lynch will be reflected in Merrill Lynch’s balance sheet. Merrill Lynch accrues income-tax-related interest and penalties, if applicable, within income tax expense.
 
Merrill Lynch’s results of operations are included in the U.S. federal income tax return and certain state income tax returns of Bank of America. The method of allocating income tax expense is determined under the intercompany tax allocation policy of Bank of America. This policy specifies that income tax expense will be computed for all Bank of America subsidiaries generally on a separate pro forma return basis, taking into account the tax position of the consolidated group and the pro forma Merrill Lynch group. Under this policy, tax benefits associated with NOLs (or other tax attributes) of Merrill Lynch are payable to Merrill Lynch upon the earlier of the utilization in Bank of America’s tax returns or the utilization in Merrill Lynch’s pro forma tax returns.
 
Securities Financing Transactions
 
Merrill Lynch enters into repurchase and resale agreements and securities borrowed and loaned transactions to accommodate customers and earn interest rate spreads (also referred to as “matched book transactions”), obtain securities for settlement and finance inventory positions. Resale and repurchase agreements are generally accounted for as collateralized financing transactions and may be recorded at their contractual amounts plus accrued interest or at fair value under the fair value option election. In resale and repurchase agreements, typically the termination date of the agreements is before the maturity date of the underlying security. However, in certain situations, Merrill Lynch may enter into agreements where the termination date of the transaction is the same as the maturity date of the underlying security. These transactions are referred to as “repo-to-maturity” transactions. Merrill Lynch enters into repo-to-maturity sales only for high quality, very liquid securities such as U.S. Treasury securities or securities issued by the government-sponsored enterprises (“GSEs”). Merrill Lynch accounts for repo-to-maturity transactions as sales and purchases in accordance with applicable accounting guidance, and accordingly, removes or recognizes the securities from the Condensed Consolidated Balance Sheet and recognizes a gain or loss, as appropriate, in the Condensed Consolidated Statement of Earnings. 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


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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 substantially collateralized.
 
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. The carrying value of securities borrowed and loaned transactions, recorded at the amount of cash collateral advanced or received, 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 substantially collateralized.
 
For securities financing transactions, Merrill Lynch’s policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under the 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. Securities financing agreements give rise to negligible credit risk as a result of these collateral provisions, and no allowance for loan losses is considered necessary. These instruments therefore are managed based on market risk rather than credit risk.
 
Substantially all securities financing activities are transacted under master 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 transactions with the same counterparty on the Condensed Consolidated Balance Sheets where it has such a master agreement, that agreement is legally enforceable and the transactions have the same maturity date.
 
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 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.
 
At the end of certain quarterly periods during the year ended December 31, 2009, BAS, which was merged into MLPF&S (see “Merger with Banc of America Securities Holdings Corporation” in this Note for a description of the merger), had recorded as sales certain transfers of agency mortgage-backed securities (“MBS”) which, based on an internal review and interpretation, should have been recorded as secured financings. As a result of the merger with BASH, Merrill Lynch has included the


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effect of these transactions in its consolidated financial statements. Merrill Lynch has recently completed a detailed review to determine whether there are additional sales of agency MBS that should have been recorded as secured financings and has identified additional transactions. These transactions did not have a material impact on Merrill Lynch’s Condensed Consolidated Financial Statements for any of the affected periods.
 
Trading Assets and Liabilities
 
Merrill Lynch’s trading activities consist primarily of securities brokerage and trading; derivatives dealing and brokerage; commodities trading and futures brokerage; and securities financing transactions. Trading assets and trading liabilities consist of cash instruments (e.g., securities and loans) and derivative instruments. Trading assets also include commodities inventory. See Note 6 for additional information on derivative instruments.
 
Trading assets and liabilities are generally recorded on a trade date basis at fair value. Included in trading liabilities are securities that Merrill Lynch has sold but did not own and will therefore be obligated to purchase at a future date (“short sales”). Commodities inventory is recorded at the lower of cost or fair value. Changes in fair value of trading assets and liabilities (i.e., unrealized gains and losses) are recognized as principal transactions revenues in the current period. Realized gains and losses and any related interest amounts are included in principal transactions revenues and interest revenues and expenses, depending on the nature of the instrument.
 
Derivatives
 
A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity security prices, currencies, commodity prices or credit spreads. Derivatives include futures, forwards, swaps, option contracts and other financial instruments with similar characteristics.
 
Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest rate swaps or currency forwards) or to purchase or sell other financial instruments at specified terms on a specified date (e.g., options to buy or sell securities or currencies). Refer to Note 6 for further information.
 
Investment Securities
 
Investment securities consist of marketable investment securities and non-qualifying investments. Refer to Note 8.
 
Marketable 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 amortized 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 assets are marked to fair value through earnings. All other qualifying securities are classified as available-for-sale (“AFS”) and are held at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) (“OCI”).


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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 fair value has declined below amortized cost to assess whether the decline in fair value is other-than-temporary. A decline in a debt security’s fair value is considered to be other-than-temporary if it is probable that all amounts contractually due will not be collected or Merrill Lynch either plans to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost. For unrealized losses on debt securities that are deemed other-than-temporary, the credit component of an other-than-temporary impairment is recognized in earnings and the non-credit 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.
 
Non-Qualifying Investments
 
Non-qualifying investments are those investments that are not within the scope of Investment Accounting and primarily include private equity investments accounted for at fair value and other equity securities carried at cost or under the equity method of accounting.
 
Private equity investments that are held for capital appreciation and/or current income are accounted for under the Investment Company Guide and carried at fair value. Additionally, certain private equity investments that are not accounted for under the Investment Company Guide may be carried at fair value under the fair value option election. The fair value of private equity investments reflects expected exit values based upon market prices or other valuation methodologies, including market comparables of similar companies and discounted expected cash flows.
 
Merrill Lynch has non-controlling investments in the common shares of corporations and in partnerships that do not fall within the scope of Investment Accounting or the Investment Company Guide. Merrill Lynch accounts for these investments using either the cost or the equity method of accounting based on management’s ability to influence the investees or Merrill Lynch may elect the fair value option. See the Consolidation Accounting section of this Note for more information.
 
For investments accounted for using the equity method, income is recognized based on Merrill Lynch’s share of the earnings or losses of the investee. Dividend distributions are generally recorded as reductions in the investment balance. Impairment testing is based on the guidance provided in Equity Method Accounting, and the investment is reduced when an impairment is deemed other-than-temporary.
 
For investments accounted for at cost, income is recognized when dividends are received, or the investment is sold. Instruments are periodically tested for impairment based on the guidance provided in Investment Accounting, and the cost basis is reduced when impairment is deemed other-than-temporary.
 
Loans, Notes and Mortgages, Net
 
Merrill Lynch’s lending and related activities include loan originations, syndications and securitizations. Loan originations include corporate and institutional loans, residential and commercial mortgages, asset-backed loans, and other loans to individuals and businesses. Merrill Lynch also engages in secondary market loan trading (see the Trading Assets and Liabilities section of 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


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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 Lynch’s 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 Lynch’s estimate of loan losses includes judgment about collectability based on available information at the balance sheet date, and the uncertainties inherent in those underlying assumptions. While management has based its estimates on the best information available, future adjustments to the allowance for loan losses may be necessary as a result of changes in the economic environment or variances between actual results and the original assumptions.
 
In general, loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, including loans that are individually identified as being impaired, are classified as non-performing unless well-secured and in the process of collection. Loans, primarily commercial, whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties are considered troubled debt restructurings (“TDRs”) and are classified as non-performing 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 considered non-performing. 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 performing 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.
 
Nonrefundable loan origination fees, loan commitment fees, and “draw down” fees received in conjunction with held for investment loans are generally deferred and recognized over the contractual life of the loan as an adjustment to the yield. If, at the outset, or any time during the term of the loan, it becomes probable that the repayment period will be extended, the amortization is recalculated using the expected remaining life of the loan. When the loan contract does not provide for a specific maturity date, management’s best estimate of the repayment period is used. At repayment of the loan, any unrecognized deferred fee is immediately recognized in earnings. If the loan is accounted for as held for sale, the fees received are deferred and recognized as part of the gain or loss on sale in other revenues. If the loan is accounted for under the fair value option election, the fees are included in the determination of the fair value and included in other revenues.
 
New Accounting Pronouncements
 
In April 2011, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on TDRs, including criteria to determine whether a loan modification represents a concession and whether the debtor is experiencing financial difficulties. This new accounting guidance was effective for Merrill


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Lynch’s interim period ended September 30, 2011 with retrospective application back to January 1, 2011. The new accounting guidance was not material to Merrill Lynch.
 
In April 2011, the FASB issued new accounting guidance that addresses effective control in repurchase agreements and eliminates the requirement for entities to consider whether the transferor has the ability to repurchase the financial assets in a repurchase agreement. This new accounting guidance will be effective, on a prospective basis, for new transactions or modifications to existing transactions, on January 1, 2012. The adoption of this guidance is not expected to have a material impact on Merrill Lynch’s consolidated financial position or results of operations.
 
In May 2011, the FASB issued amendments to Fair Value Accounting. The amendments clarify the application of the highest and best use and valuation premise concepts, preclude the application of blockage factors in the valuation of all financial instruments and include criteria for applying the fair value measurement principles to portfolios of financial instruments. The amendments additionally prescribe enhanced financial statement disclosures for Level 3 fair value measurements. The new amendments will be effective for the three months ended March 31, 2012. Merrill Lynch is currently assessing the impact of this guidance on its consolidated financial position and results of operations.
 
In June 2011, the FASB issued new accounting guidance on the presentation of comprehensive income in financial statements. The new guidance requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. This new accounting guidance will be effective for Merrill Lynch for the three months ended March 31, 2012. The adoption of this guidance, which involves disclosures only, will not impact Merrill Lynch’s consolidated financial position or results of operations.
 
In September 2011, the FASB issued new accounting guidance that simplifies goodwill impairment testing. The new guidance permits entities to make a qualitative assessment of whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value before applying the two-step impairment test. If it is not more-likely-than-not that the fair value of a reporting unit is less than the carrying amount, an entity would not be required to perform the two-step impairment test. The guidance includes factors for entities to consider when making the qualitative assessment, including macroeconomic and company-specific factors as well as factors relating to a specific reporting unit. Merrill Lynch early adopted the new accounting guidance for the annual goodwill impairment test completed during the three months ended September 30, 2011 and the adoption did not have a material impact on the results of the goodwill impairment test.
 
Note 2.  Transactions with Bank of America
 
Merrill Lynch has entered into various transactions with Bank of America, primarily to integrate certain activities within either Bank of America or Merrill Lynch. Transactions with Bank of America also include various asset and liability transfers and transactions associated with intercompany sales and trading and financing activities.
 
Merger with BASH
 
See Note 1 — “Merger with Banc of America Securities Holdings Corporation (“BASH”)” for further information on this transaction.
 
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


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and payable to Bank of America as of September 30, 2011 and December 31, 2010 are presented below:
 
Receivables from Bank of America are comprised of:
 
                 
(dollars in millions)   September 30, 2011   December 31, 2010
 
 
Cash and cash equivalents
  $ 6,707     $ 14,471  
Cash and securities segregated for regulatory purposes
    7,405       5,508  
Receivables under resale agreements
    29,106       31,053  
Trading assets
    1,475       643  
Net intercompany funding receivable
    9,264       7,305  
Other receivables
    1,701       1,460  
Other assets
    -       215  
                 
Total
  $ 55,658     $ 60,655  
                 
 
Payables to Bank of America are comprised of:
 
                 
(dollars in millions)   September 30, 2011   December 31, 2010
 
 
Payables under repurchase agreements
  $ 20,210     $ 12,890  
Payables under securities loaned transactions
    2,359       2,352  
Short-term borrowings
    2,395       1,901  
Deposits
    90       33  
Trading liabilities
    2,334       520  
Other payables
    3,620       2,746  
Long-term borrowings(1)
    2,579       2,579  
                 
Total
  $ 33,587     $ 23,021  
                 
 
 
 
(1) Amounts are subordinated borrowings from Bank of America (see Note 12).
 
Total net revenues and non-interest expenses related to transactions with Bank of America for the three months ended September 30, 2011 were $288 million and $537 million, respectively. Such revenues and expenses for the nine months ended September 30, 2011 were $822 million and $1,766 million, respectively. Total net revenues and non-interest expenses related to transactions with Bank of America for the three months ended September 30, 2010 were net losses of $111 million and expenses of $365 million, respectively. Such revenues and expenses for the nine months ended September 30, 2010 were net losses of $100 million and expenses of $816 million, respectively. Non-interest expenses for the three and nine months ended September 30, 2011 reflect increased intercompany service fees resulting from the integration of Bank of America’s and Merrill Lynch’s methodologies for allocating expenses associated with shared services to their subsidiaries. The results for the nine months ended September 30, 2011 and September 30, 2010 included gains of $5 million and $282 million, respectively, from the sale of approximately $3.7 billion and $11.2 billion, respectively, of available-for-sale securities to Bank of America. These transfers were made to enable Bank of America or its non-Merrill Lynch subsidiaries to more efficiently manage the existing portfolio of similar available-for-sale securities.
 
Bank of America and Merrill Lynch have entered into certain intercompany lending and borrowing arrangements to facilitate centralized liquidity management. Included in these arrangements is a $50 billion one-year revolving line of credit that allows Bank of America to borrow funds from Merrill Lynch at a spread to LIBOR that is reset periodically and is consistent with other intercompany agreements. The line of credit matures on January 1, 2012 and will automatically be extended by one year to the succeeding January 1st unless Merrill Lynch provides written notice not to extend at least 45 days prior to the maturity date. Approximately $7.1 billion and $6.1 billion were outstanding under this line of credit as of September 30, 2011 and December 31, 2010, respectively. In addition, in October 2011, Merrill Lynch


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entered into a short-term revolving credit facility that will allow Bank of America to borrow up to an additional $25 billion. For information on Merrill Lynch’s other borrowing arrangements with Bank of America, including Bank of America’s guarantees of certain debt securities, warrants and/or other certificates and obligations of certain subsidiaries of ML & Co., refer to Note 12. Bank of America has also guaranteed the performance of Merrill Lynch on certain derivative transactions (see Note 6).
 
Note 3.  Segment and Geographic Information
 
Segment Information
 
Pursuant to ASC 280, 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. The business activities of Merrill Lynch are included within certain of the operating segments of Bank of America. Detailed financial information related to the operations of Merrill Lynch, however, is not provided to Merrill Lynch’s chief operating decision maker. As a result, Merrill Lynch does not contain any identifiable operating segments under Segment Reporting, and therefore 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.


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The information that follows, in management’s judgment, provides a reasonable representation of each region’s contribution to the consolidated net revenues:
 
                                 
    Three Months Ended
  Nine Months Ended
  Three Months Ended
  Nine Months Ended
(dollars in millions)   September 30, 2011   September 30, 2011   September 30, 2010   September 30, 2010
 
 
Revenues, net of interest expense
                               
Europe, Middle East, and Africa
  $ 568     $ 3,217     $ 1,079     $ 3,811  
Pacific Rim
    692       2,028       421       1,521  
Latin America
    312       1,039       203       783  
Canada
    74       227       49       177  
                                 
Total Non-U.S. 
    1,646       6,511       1,752       6,292  
United States(1)(2)
    4,224       14,121       3,984       15,535  
                                 
Total revenues, net of interest expense(3)
  $ 5,870     $ 20,632     $ 5,736     $ 21,827  
                                 
 
 
 
(1) U.S. results for the three and nine months ended September 30, 2011 included gains of $2.9 billion and $2.7 billion, respectively, due to the impact of changes in Merrill Lynch’s credit spreads on the carrying values of certain long-term borrowings, primarily structured notes. U.S. results for the three and nine months ended September 30, 2010 included losses of $0.3 billion and gains of $1.1 billion, respectively, due to the impact of changes in Merrill Lynch’s credit spreads on the carrying values of certain long-term borrowings, primarily structured notes.
(2) Corporate net revenues and adjustments are reflected in the U.S. region.
(3) Results for the three and nine months ended September 30, 2011 included gains of $0.7 billion and $0.6 billion, respectively, associated with the valuation of derivative liabilities due to changes in Merrill Lynch’s credit spreads. Results for the three months ended September 30, 2010 included losses of $0.1 billion associated with the valuation of derivative liabilities due to changes in Merrill Lynch’s credit spreads; the impact on the results for the nine months ended September 30, 2010 was not material.
 
Note 4.  Fair Value Disclosures
 
Fair Value Accounting
 
Fair Value Hierarchy
 
In accordance with Fair Value Accounting, Merrill Lynch has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy.
 
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
 
Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
 
Level 1.   Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Merrill Lynch has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, U.S. Government securities, and certain other sovereign government obligations).
 
Level 2.   Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
 
  a)  Quoted prices for similar assets or liabilities in active markets (examples include restricted stock and U.S. agency securities);


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  b)  Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which can trade infrequently);
 
  c)  Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
 
  d)  Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities and derivatives).
 
Level 3.   Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s view about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets and long-dated or complex derivatives).
 
As required by Fair Value Accounting, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Level 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.
 
Valuation Techniques
 
The following outlines the valuation methodologies for Merrill Lynch’s material categories of assets and liabilities:
 
U.S. Government and agencies
 
U.S. Treasury securities U.S. Treasury securities are valued using quoted market prices and are generally classified as Level 1 in the fair value hierarchy.
 
U.S. agency securities U.S. agency securities are comprised of two main categories consisting of agency issued debt and mortgage pass-throughs. The fair value of agency issued debt securities is derived using market prices and recent trade activity gathered from independent dealer pricing services or brokers. Mortgage pass-throughs include To-be-announced (“TBA”) securities and mortgage pass-through certificates. TBA securities are generally valued using quoted market prices. Generally, the fair value of mortgage pass-through certificates is based on market prices of comparable securities. Agency


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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 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 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.


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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 in 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. In addition, for most collateralized interest rate and currency derivatives the requirement to pay interest on the collateral may be considered in the valuation. The majority of OTC derivative contracts are classified as Level 2 in the fair value hierarchy.
 
OTC derivative contracts that do not have readily observable market based pricing parameters are classified as Level 3 in the fair value hierarchy. Examples of derivative contracts classified within Level 3 include contractual obligations that have tenures that extend beyond periods in which inputs to the model would be observable, exotic derivatives with significant inputs into a valuation model that are less transparent in the market and certain credit default swaps (“CDS”) referenced to mortgage-backed securities. For example, derivative instruments, such as certain CDS referenced to RMBS,


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CMBS, ABS and collateralized debt obligations (“CDOs”), may be valued based on the underlying mortgage risk where 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 Asset Backed Securities Index (“ABX”) or Commercial Mortgage Backed Securities Index (“CMBX”) and prepayment and default scenarios and analyses.
 
CDOs The fair value of CDOs is derived from a referenced basket of CDS, the CDO’s capital structure, and the default correlation, which is an input to a proprietary CDO valuation model. The underlying CDO portfolios typically contain investment grade as well as non-investment grade obligors. After adjusting for differences in risk profile, the correlation parameter for an actual transaction is estimated by benchmarking against observable standardized index tranches and other comparable transactions. CDOs are classified as either Level 2 or Level 3 in the fair value hierarchy.
 
Investment securities non-qualifying
 
Investments in Private Equity, Real Estate and Hedge Funds Merrill Lynch has investments in numerous asset classes, including: direct private equity, private equity funds, hedge funds and real estate funds. Valuing these investments requires significant management judgment due to the nature of the assets and the lack of quoted market prices and liquidity in these assets. Initially, the transaction price of the investment is generally considered to be the best indicator of fair value. Thereafter, valuation of direct investments is based on an assessment of each individual investment using various methodologies, which include publicly traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flows. These valuations are subject to appropriate discounts for lack of liquidity or marketability. Certain factors which may influence changes to fair value include but are not limited to, recapitalizations, subsequent rounds of financing, and offerings in the equity or debt capital markets. For fund investments, Merrill Lynch generally records the fair value of its proportionate interest in the fund’s capital as reported by the fund’s respective managers.
 
Investment securities non-qualifying include equity securities that have recently gone through initial public offerings or secondary sales of public positions. These 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 in private equity, real estate and hedge funds 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.
 
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


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curves, option volatility, currency, commodity or equity rates and correlations between these inputs. The impact of Merrill Lynch’s own credit spreads is also included based on Merrill Lynch’s observed secondary bond market spreads. Structured notes are classified as either Level 2 or Level 3 in the fair value hierarchy.
 
Recurring Fair Value
 
The following tables present Merrill Lynch’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, respectively.
 
                                         
    Fair Value Measurements on a Recurring Basis
    as of September 30, 2011
                Netting
   
(dollars in millions)   Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Assets:
                                       
Securities segregated for regulatory purposes or deposited with clearing organizations:
                                       
Corporate debt
  $ -     $ 319     $ -     $ -     $ 319  
Non-U.S. governments and agencies
    -       1,777       -       -       1,777  
U.S. Government and agencies
    982       765       -       -       1,747  
                                         
Total securities segregated for regulatory purposes or deposited with clearing organizations
    982       2,861       -       -       3,843  
                                         
Receivables under resale agreements
    -       89,119       -       -       89,119  
Receivables under securities borrowed transactions
    -       1,543       -       -       1,543  
Trading assets, excluding derivative contracts:
                                       
Equities
    13,339       7,078       164       -       20,581  
Convertible debentures
    -       4,331       154       -       4,485  
Non-U.S. governments and agencies
    26,144       1,826       375       -       28,345  
Corporate debt
    -       15,661       4,314       -       19,975  
Preferred stock
    -       -       297       -       297  
Mortgages, mortgage-backed and asset-backed
    -       4,020       3,220       -       7,240  
U.S. Government and agencies
    23,656       19,910       -       -       43,566  
Municipals and money markets
    1,345       11,031       2,266       -       14,642  
Physical commodities and other
    -       447       -       -       447  
                                         
Total trading assets, excluding derivative contracts
    64,484       64,304       10,790       -       139,578  
                                         
Derivative contracts(2)
    4,524       803,294       10,895       (779,480 )     39,233  
Investment securities available-for-sale:
                                       
U.S. treasury securities and agency debentures
    393       -       -       -       393  
Securities, mortgage-backed
                                       
and asset-backed — Agency CMOs
    -       -       55       -       55  
— Non-agency MBSs
    -       404       86       -       490  
— Corporate ABS
    -       -       242       -       242  
                                         
Total investment securities available-for-sale
    393       404       383       -       1,180  
                                         
Investment securities non-qualifying
    2,497       195       1,288       -       3,980  
                                         
Total investment securities
    2,890       599       1,671       -       5,160  
                                         
Securities received as collateral
    11,874       684       -       -       12,558  
Loans, notes and mortgages
    -       560       1,839       -       2,399  
Other Assets
    -       -       1,578       -       1,578  


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    Fair Value Measurements on a Recurring Basis
    as of September 30, 2011
                Netting
   
(dollars in millions)   Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Liabilities:
                                       
Payables under repurchase agreements
    -       36,943       -       -       36,943  
Short-term borrowings
    -       5,527       -       -       5,527  
Trading liabilities, excluding derivative contracts: Equities
    14,228       2,239       -       -       16,467  
Convertible debentures
    -       135       -       -       135  
Non-U.S. governments and agencies
    16,092       610       -       -       16,702  
Corporate debt
    -       9,588       53       -       9,641  
Preferred stock
    -       -       14       -       14  
U.S. Government and agencies
    14,216       2,461       -       -       16,677  
Municipals, money markets and other
    360       110       3       -       473  
                                         
Total trading liabilities, excluding derivative contracts
    44,896       15,143       70       -       60,109  
                                         
Derivative contracts(2)
    4,044       800,649       6,442       (781,597 )     29,538  
Obligation to return securities received as collateral
    11,874       684       -       -       12,558  
Other payables — interest and other
    -       182       7       -       189  
Long-term borrowings
    -       28,877       2,144       -       31,021  
 
 
 
(1) Represents counterparty and cash collateral netting.
(2) Refer to Note 6 for product level detail.
 
Transfers between Level 1 and Level 2 assets and liabilities were not significant for the three or nine month periods ended September 30, 2011.
 
Level 3 derivative contracts (assets) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $2.6 billion, $3.5 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $4.7 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 other assets represent net monoline exposure to a single counterparty. This exposure was reclassified from derivative contracts (assets) during the third quarter of 2011 because of the inherent default risk and given that these contracts no longer provide a hedge benefit (see Note 6).
 
Level 3 derivative contracts (liabilities) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $1.7 billion, $1.0 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $3.7 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 $1.7 billion, which have unobservable model valuation inputs (e.g., unobservable correlation).
 


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    Fair Value Measurements on a Recurring Basis
    as of December 31, 2010
                Netting
   
(dollars in millions)   Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Assets:
                                       
Securities segregated for regulatory purposes or deposited with clearing organizations:
                                       
Corporate debt
  $ -     $ 306     $ -     $ -     $ 306  
Non-U.S. governments and agencies
    1,652       1,402       -       -       3,054  
U.S. Government and agencies
    1,419       1,413       -       -       2,832  
                                         
Total securities segregated for regulatory purposes or deposited with clearing organizations
    3,071       3,121       -       -       6,192  
                                         
                                         
Receivables under resale agreements(2)
    -       74,255       -       -       74,255  
Receivables under securities borrowed transactions
    -       1,672       -       -       1,672  
Trading assets, excluding derivative contracts:
                                       
Equities
    20,458       7,673       170       -       28,301  
Convertible debentures
    -       5,903       -       -       5,903  
Non-U.S. governments and agencies
    18,393       3,612       243       -       22,248  
Corporate debt
    -       22,300       4,605       -       26,905  
Preferred stock
    -       511       287       -       798  
Mortgages, mortgage-backed and asset-backed
    -       5,247       5,747       -       10,994  
U.S. Government and agencies(3)
    17,742       23,636       -       -       41,378  
Municipals and money markets
    732       11,102       2,327       -       14,161  
Physical commodities and other
    -       598       -       -       598  
                                         
Total trading assets, excluding derivative contracts
    57,325       80,582       13,379       -       151,286  
                                         
Derivative contracts(4)
    1,622       590,020       14,359       (566,630 )     39,371  
Investment securities available-for-sale:
                                       
U.S. Treasury securities and agency debentures
    430       -       -       -       430  
Mortgage-backed securities — residential MBS
    -       3,869       -       -       3,869  
Mortgage-backed securities — agency CMOs
    -       61       -       -       61  
Mortgage-backed securities — non-agency MBS
    -       518       213       -       731  
                                         
Total investment securities available-for-sale
    430       4,448       213       -       5,091  
                                         
Investment securities non-qualifying
    2,792       690       3,394               6,876  
                                         
Total investment securities
    3,222       5,138       3,607       -       11,967  
                                         
Securities received as collateral
    19,471       892       -       -       20,363  
Loans, notes and mortgages
    -       1,423       1,891       -       3,314  
Liabilities:
                                       
Payables under repurchase agreements
    -       37,394       -       -       37,394  
Short-term borrowings
    -       6,472       -       -       6,472  
Trading liabilities, excluding derivative contracts:
                                       
Equities
    11,706       914       -       -       12,620  
Convertible debentures
    -       1,406       -       -       1,406  
Non-U.S. governments and agencies
    14,748       957       -       -       15,705  
Corporate debt
    -       9,500       -       -       9,500  
U.S. Government and agencies
    19,860       4,887       -       -       24,747  
Municipals, money markets and other
    224       347       -       -       571  
                                         
Total trading liabilities, excluding derivative contracts
    46,538       18,011       -       -       64,549  
                                         
Derivatives contracts(4)
    1,142       590,138       7,991       (567,074 )     32,197  
Obligation to return securities received as collateral
    19,471       892       -       -       20,363  
Other payables — interest and other
    -       39       126       -       165  
Long-term borrowings
    -       36,818       2,396       -       39,214  
 
 
 
(1) Represents counterparty and cash collateral netting.


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(2) Receivables under resale agreements have been revised from approximately $51 billion (as previously reported) to approximately $74 billion. A similar revision has been made on the balance sheet to the parenthetical disclosure of receivables under resale agreements measured at fair value in accordance with the fair value option election.
(3) U.S. Government and agencies trading asset amounts shown in Level 1 and Level 2 have been revised from approximately $7 billion and $34 billion, respectively (as previously reported) to approximately $18 billion and $24 billion, respectively.
(4) Refer to Note 6 for product level detail.
 
Level 3 derivative contracts (assets) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $5.7 billion, $4.1 billion of other credit derivatives that incorporate unobservable model valuation inputs, 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) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $2.2 billion, $2.0 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $3.8 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 $1.9 billion that are long-dated and/or have unobservable model valuation inputs (e.g., unobservable correlation).


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The following tables provide a summary of changes in Merrill Lynch’s Level 3 financial assets and liabilities for the three and nine months ended September 30, 2011 and September 30, 2010.
 
                                                                                                         
(dollars in millions)
    Level 3 Financial Assets and Liabilities
    Three Months Ended September 30, 2011
                    Total Realized
                               
        Total Realized and Unrealized Gains or (Losses)
  and Unrealized
  Unrealized
                           
        included in Income   Gains or (Losses)
  Gains or
                           
    Beginning
  Principal
  Other
      included in
  (Losses) to
                  Transfers
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   Income   OCI   Sales   Purchases   Issuances   Settlements   In   Out   Balance
 
 
Assets:
                                                                                                       
Trading assets, excluding derivative contracts:
                                                                                                       
Equities
  $ 163     $ (9 )   $ -     $ -     $ (9 )   $ -     $ (73 )   $ 73     $ -     $ (1 )   $ 11     $ -     $ 164  
                                                                                                         
Convertible debentures
    152       -       -       -       -       -       (13 )     9       -       -       18       (12 )     154  
Non-U.S. governments and agencies
    391       (17 )     -       -       (17 )     -       (3 )     3       -       -       1       -       375  
Corporate debt
    3,846       (199 )     -       -       (199 )     -       (433 )     925       -       (238 )     516       (103 )     4,314  
Preferred stock
    307       1       -       -       1       -       (17 )     30       -       (24 )     -       -       297  
Mortgages, mortgage-backed and asset-backed
    4,848       (98 )     -       -       (98 )     -       (1,281 )     83       -       (51 )     -       (281 )     3,220  
Municipals and money markets
    2,486       22       -       -       22       -       (158 )     52       -       (189 )     54       (1 )     2,266  
                                                                                                         
Total trading assets, excluding derivative contracts
    12,193       (300 )     -       -       (300 )     -       (1,978 )     1,175       -       (503 )     600       (397 )     10,790  
                                                                                                         
Derivative contracts, net
    5,101       988       -       -       988       -       (114 )     109       -       (1,912 )     285       (4 )     4,453  
Investment securities available-for-sale:
                                                                                                       
Mortgage-backed securities — agency CMOs
    55       -       -       -       -       -       -       -       -       -       -       -       55  
Mortgage-backed securities — non-agency MBSs
    96       -       (5 )     -       (5 )     (13 )     (1 )     9       -       -       -       -       86  
Corporate ABS
    86       -       (6 )     -       (6 )     -       -       162       -       -       -       -       242  
                                                                                                         
Total investment securities available-for-sale
    237       -       (11 )     -       (11 )     (13 )     (1 )     171       -       -       -       -       383  
                                                                                                         
Investment securities non-qualifying
    1,571       -       106       -       106               (286 )     6       -       (109 )     -       -       1,288  
                                                                                                         
Total investment securities
    1,808       -       95       -       95       (13 )     (287 )     177       -       (109 )     -       -       1,671  
                                                                                                         
Loans, notes and mortgages
    1,940       -       (61 )     8       (53 )     -       (154 )     2       450       (20 )     -       (326 )     1,839  
Other Assets
    -       -       -       -       -       -       -       1,578       -       -       -       -       1,578  
Liabilities:
                                                                                                       
Trading liabilities, excluding derivative contracts:
                                                                                                       
Corporate debt
    28       1       -       -       1       -       12       (10 )     -       -       24       -       53  
Preferred stock
    23       2       -       -       2       -       -       (7 )     -       -       -       -       14  
Municipals, money markets and other
    3       (1 )     -       -       (1 )     -       -       (1 )     -       -       -       -       3  
                                                                                                         
Total trading liabilities, excluding derivative contracts
    54       2       -       -       2       -       12       (18 )     -       -       24       -       70  
                                                                                                         
Other payables — interest and other
    108       -       1       -       1       -       -       -       -       -       -       (100 )     7  
Long-term borrowings
    2,532       344       18       -       362       -       17       (120 )     164       (173 )     326       (240 )     2,144  
 
 
 
Net gains in principal transactions related to derivative contracts, net were primarily due to credit spreads widening on short CDS baskets.
 
Sales of mortgages, mortgage-backed and asset-backed securities primarily relates to the sale of CDO and collateralized loan obligation (“CLO”) positions.
 
Purchases of corporate debt primarily relates to purchases of non-investment grade and distressed corporate loans and bonds.
 
The purchases for other assets and settlements for derivative contracts, net reflect the reclassification of approximately $1.6 billion of net monoline exposure from derivative contracts (assets) to other assets because of the inherent default risk and given that these contracts no longer provide a hedge benefit.


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Transfers in for corporate debt are primarily due to decreased observability (i.e., decreased market liquidity) for certain corporate loans and bonds. Transfers out for mortgages, mortgage-backed and asset-backed securities primarily relates to increased observability (i.e., trading activity) for certain CMBS positions. Transfers in for derivative contracts, net are primarily due to certain equity derivative positions with unobservable correlation. Transfers out for loans, notes and mortgages and other payables — interest and other primarily relates to increased observability (i.e., liquid comparables) for certain corporate loans and unfunded loan commitments. Transfers in and 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
    Nine Months Ended September 30, 2011
        Total Realized and Unrealized
  Total Realized
                               
        Gains or (Losses)
  and Unrealized
  Unrealized
                           
        included in Income   Gains or (Losses)
  Gains or
                           
    Beginning
  Principal
  Other
      included in
  (Losses) to
                  Transfers
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   Income   OCI   Sales   Purchases   Issuances   Settlements   In   Out   Balance
 
 
Assets:
                                                                                                       
Trading assets, excluding derivative contracts:
                                                                                                       
Equities
  $ 170     $ 26     $ -     $ -     $ 26     $ -     $ (159 )   $ 181     $ -     $ (64 )   $ 11     $ (1 )   $ 164  
Convertible debentures
    -       7       -       -       7       -       (97 )     238       -       -       18       (12 )     154  
Non-U.S. governments and agencies
    243       68       -       -       68       -       (18 )     125       -       (3 )     4       (44 )     375  
Corporate debt
    4,605       128       -       -       128       -       (2,529 )     2,043       -       (346 )     763       (350 )     4,314  
Preferred stock
    287       29       -       -       29       -       (123 )     60       -       (76 )     120       -       297  
Mortgages, mortgage-backed and asset-backed
    5,747       286       -       -       286       -       (3,689 )     1,596       -       (90 )     1       (631 )     3,220  
Municipals and money markets
    2,327       53       -       -       53       -       (1,810 )     1,936       -       (361 )     126       (5 )     2,266  
                                                                                                         
Total trading assets, excluding derivative contracts
    13,379       597       -       -       597       -       (8,425 )     6,179       -       (940 )     1,043       (1,043 )     10,790  
                                                                                                         
Derivative contracts, net
    6,368       1,015       -       -       1,015       -       (796 )     742       -       (2,774 )     584       (686 )     4,453  
Investment securities available-for-sale:
                                                                                                       
Mortgage-backed securities — agency CMOs
    -       -       -       -       -       -       -       56       -       (1 )     -       -       55  
Mortgage-backed securities — non-agency MBSs
    213       -       (20 )     -       (20 )     (35 )     (83 )     11       -       -       -       -       86  
Corporate ABS
    -       -       (6 )     -       (6 )     -       -       248       -       -       -       -       242  
                                                                                                         
Total investment securities available-for-sale
    213       -       (26 )     -       (26 )     (35 )     (83 )     315       -       (1 )     -       -       383  
                                                                                                         
Investment securities non-qualifying
    3,394       -       451       -       451       -       (1,138 )     52       -       (298 )     375       (1,548 )     1,288  
                                                                                                         
Total investment securities
    3,607       -       425       -       425       (35 )     (1,221 )     367       -       (299 )     375       (1,548 )     1,671  
                                                                                                         
Loans, notes and mortgages
    1,891       -       168       25       193       -       (650 )     146       665       (175 )     135       (366 )     1,839  
Other Assets
    -       -       -       -       -       -       -       1,578       -       -       -       -       1,578  
Liabilities:
                                                                                                       
Trading liabilities, excluding derivative contracts:
                                                                                                       
Corporate debt
    -       -       -       -       -       -       84       (55 )     -       -       24       -       53  
Preferred stock
    -       2       -       -       2       -       23       (7 )     -       -       -       -       14  
Municipals, money markets and other
    -       (1 )     -       -       (1 )     -       22       (20 )     -       -       -       -       3  
                                                                                                         
Total trading liabilities, excluding derivative contracts
    -       1       -       -       1       -       129       (82 )     -       -       24       -       70  
                                                                                                         
Other payables — interest and other
    126       -       26       -       26       -       4       (6 )     9       -       -       (100 )     7  
Long-term borrowings
    2,396       242       3       -       245       -       72       (232 )     412       (499 )     855       (615 )     2,144  
 
 
 
Net gains in principal transactions related to derivative contracts, net were primarily due to credit spreads widening on short CDS baskets in the third quarter of 2011.


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Sales of corporate debt primarily relates to sales of corporate ARS and distressed loans during the first quarter of 2011. Sales of mortgages, mortgage-backed and asset-backed securities primarily relates to the sale of CDO positions in conjunction with the liquidation of a VIE and sales of CLO positions due to the unwind of Merrill Lynch’s proprietary trading business. Purchases of corporate debt primarily relates to purchases of non-investment grade and distressed corporate loans and bonds. Purchases of mortgages, mortgage-backed and asset-backed securities primarily relates to purchases of CDO and CLO positions. Sales and purchases of municipal securities is primarily due to dealer activity in student loan ARS. Sales of investment securities non-qualifying primarily relates to the sale of a private equity investment during the first quarter of 2011.
 
The purchases for other assets and settlements for derivative contracts, net reflect the reclassification of approximately $1.6 billion of net monoline exposure from derivative contracts (assets) to other assets because of the inherent default risk and given that these contracts no longer provide a hedge benefit.
 
Transfers in for corporate debt are primarily due to decreased observability (i.e., decreased market liquidity) for certain corporate loans and bonds. Transfers out for corporate debt primarily relates to increased price observability (e.g., trading comparables) for certain corporate bond positions. Transfers out for mortgages, mortgage-backed and asset-backed securities primarily relates to increased price observability for certain RMBS, CMBS and consumer ABS portfolios. Transfers in for derivative contracts, net primarily relates to changes in the valuation methodology for certain CDO positions, in addition to certain equity derivative positions with unobservable correlation. Transfers out for derivative contracts, net primarily relates to increased price observability for certain equity and credit derivative positions. Transfers in for investment securities non-qualifying are due to a change in the valuation methodology for a private equity fund. Transfers out related to investment securities non-qualifying are due to a private equity investment that underwent an initial public offering during the first quarter of 2011. Transfers out for loans, notes and mortgages and other payables — interest and other primarily relates to increased observability (i.e., liquid comparables) for certain corporate loans and unfunded loan commitments. Transfers in and 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
    Three Months Ended September 30, 2010
                            Purchases,
           
        Total Realized and Unrealized Gains or (Losses)
  Total Realized and
  Unrealized
  Sales,
           
        Included in Income   Unrealized Gains
  Gains or
  Issuances
           
    Beginning
  Principal
  Other
      or (Losses)
  (Losses) to
  and
  Transfers
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   included in Income   OCI   Settlements   In   out   Balance
 
 
Assets:
                                                                               
Trading assets, excluding derivative contracts:
                                                                               
Equities
  $ 345     $ (20 )   $ -     $ -     $ (20 )   $ -     $ 5     $ 2     $ (4 )   $ 328  
Non-U.S. governments and agencies
    940       22       -       -       22       -       (52 )     11       (653 )     268  
Corporate debt
    5,580       202       -       -       202       -       (442 )     260       (555 )     5,045  
Preferred stock
    188       2       -       -       2       -       15       -       -       205  
Mortgages, mortgage-backed and asset-backed
    6,874       111       -       -       111       -       (226 )     20       -       6,779  
Municipals and money markets
    3,116       28       -       -       28       -       (221 )     -       -       2,923  
                                                                                 
Total trading assets, excluding derivative contracts
    17,043       345       -       -       345       -       (921 )     293       (1,212 )     15,548  
                                                                                 
Derivative contracts, net
    6,591       (246 )     -       -       (246 )     -       818       182       (551 )     6,794  
Investment securities available-for-sale:
                                                                               
Mortgage-backed securities — residential non-agency MBSs
    352       -       (27 )     -       (27 )     23       (33 )     21       -       336  
                                                                                 
Total investment securities available-for-sale
    352       -       (27 )     -       (27 )     23       (33 )     21       -       336  
                                                                                 
Investment securities non-qualifying
    4,128       -       (249 )     -       (249 )     -       (104 )     -       -       3,775  
                                                                                 
Total investment securities
    4,480       -       (276 )     -       (276 )     23       (137 )     21       -       4,111  
                                                                                 
Loans, notes and mortgages
    3,152       -       289       32       321       -       (196 )     11       (66 )     3,222  
Liabilities:
                                                                               
Trading liabilities, excluding derivative contracts:
                                                                               
Non-U.S. governments and agencies
    7       -       -       -       -       -       (7 )     -       -       -  
                                                                                 
Total trading liabilities, excluding derivative contracts
    7       -       -       -       -       -       (7 )     -       -       -  
                                                                                 
Other liabilities — interest and other
    154       -       16       -       16       -       -       -       -       138  
Long-term borrowings
    4,006       (120 )     (102 )     -       (222 )     -       (254 )     390       (441 )     3,923  
 
 


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Transfers out for non-U.S. governments and agencies primarily relates to increased price testing coverage for certain positions.
 
Increase in purchases, sales, issuances and settlements related to derivatives contracts, net primarily relates to the termination of certain total return swaps in a liability position.
 
Transfers out for derivatives contracts, net primarily relates to $1.3 billion of derivatives assets and $700 million of derivative liabilities transferred to Level 2 as a result of increase price observability and price testing coverage for certain 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
    Nine Months Ended September 30, 2010
        Total Realized and Unrealized Gains or (Losses)
  Total Realized and
  Unrealized
  Purchases,
           
        Included in Income   Unrealized Gains
  Gains or
  Sales,
           
    Beginning
  Principal
  Other
      or (Losses)
  (Losses) to
  Issuances and
  Transfers
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   Included in Income   OCI   Settlements   In   Out   Balance
 
 
Assets:
                                                                               
Trading assets, excluding derivative contracts:
                                                                               
Equities
  $ 351     $ (31 )   $ -     $ -     $ (31 )   $ -     $ 10     $ 74     $ (76 )   $ 328  
Non-U.S. governments and agencies
    1,142       (133 )     -       -       (133 )     -       (131 )     102       (712 )     268  
Corporate debt
    6,790       453       -       -       453       -       (1,958 )     912       (1,152 )     5,045  
Preferred stock
    562       (23 )     -       -       (23 )     -       (333 )     -       (1 )     205  
Mortgages, mortgage-backed and asset-backed
    7,294       187       -       -       187       -       (661 )     404       (445 )     6,779  
Municipals and money markets
    2,148       44       -       -       44       -       (390 )     1,234       (113 )     2,923  
                                                                                 
Total trading assets, excluding derivative contracts
    18,287       497       -       -       497       -       (3,463 )     2,726       (2,499 )     15,548  
                                                                                 
Derivative contracts, net
    6,866       (882 )     -       -       (882 )     -       665       692       (547 )     6,794  
Investment securities available-for-sale:
                                                                               
Mortgage-backed securities — residential non-agency MBSs
    473       -       (94 )     24       (70 )     (29 )     (102 )     76       (12 )     336  
                                                                                 
Total investment securities available-for-sale
    473       -       (94 )     24       (70 )     (29 )     (102 )     76       (12 )     336  
                                                                                 
Investment securities non-qualifying
    3,696       -       962       -       962       -       (748 )     -       (135 )     3,775  
                                                                                 
Total investment securities
    4,169       -       868       24       892       (29 )     (850 )     76       (147 )     4,111  
                                                                                 
Loans, notes and mortgages
    4,115       -       148       123       271       -       (1,109 )     11       (66 )     3,222  
Liabilities:
                                                                               
Trading liabilities, excluding derivative contracts:
                                                                               
Non-U.S. governments and agencies
    386       21       2       -       23       -       17       -       (380 )     -  
                                                                                 
Total trading liabilities, excluding derivative contracts
    386       21       2       -       23       -       17       -       (380 )     -  
                                                                                 
Other liabilities — interest and other
    186       -       27       -       27       -       (21 )     -       -       138  
Long-term borrowings
    4,683       475       90       -       565       -       (51 )     1,206       (1,350 )     3,923  
 
 
 
Other revenue related to investment securities non-qualifying primarily represents net gains on certain private equity investments.
 
Decreases in purchases, sales, 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. Decreases in purchases, sales, issuances and settlements related to loans, notes and mortgages primarily relates to sales and repayments of sizable positions and portfolios during the first and second quarter of 2010.


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Transfers in for municipals and money markets relates to reduced price transparency (e.g., lower trading activity) for municipal ARS. Transfers out for corporate debt primarily relates to increased price testing coverage for certain 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.
 
The following tables provide the portion of gains or losses included in income for the three and nine months ended September 30, 2011 and September 30, 2010 attributable to unrealized gains or losses relating to those Level 3 assets and liabilities held at September 30, 2011 and September 30, 2010, respectively.
 
                                                                 
(dollars in millions)
    Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
    Three Months Ended September 30, 2011   Nine Months Ended September 30, 2011
    Principal
  Other
          Principal
  Other
       
    Transactions   Revenue   Interest   Total   Transactions   Revenue   Interest   Total
 
 
Assets:
                                                               
Trading assets, excluding derivative contracts:
                                                               
Equities
  $ (9 )   $ -     $ -     $ (9 )   $ (55 )   $ -     $ -     $ (55 )
Convertible debentures
    -       -       -       -       3       -       -       3  
Non-U.S. governments and agencies
    16       -       -       16       86       -       -       86  
Corporate debt
    (206 )     -       -       (206 )     (52 )     -       -       (52 )
Preferred stock
    (11 )     -       -       (11 )     12       -       -       12  
Mortgages, mortgage-backed and asset-backed
    (116 )     -       -       (116 )     85       -       -       85  
Municipals and money markets
    1       -       -       1       17       -       -       17  
                                                                 
Total trading assets, excluding derivative contracts
    (325 )     -       -       (325 )     96       -       -       96  
                                                                 
Derivative contracts, net
    875       -       -       875       1,144       -       -       1,144  
Investment securities available-for-sale:
                                                               
Mortgage-backed securities — non-agency MBSs
    -       (5 )     -       (5 )     -       (30 )     -       (30 )
Corporate/Agency bonds
    -       (6 )     -       (6 )     -       (6 )     -       (6 )
                                                                 
Total investment securities available-for-sale
    -       (11 )     -       (11 )     -       (36 )     -       (36 )
                                                                 
Investment securities non-qualifying
    -       (54 )     -       (54 )     -       38       -       38  
                                                                 
Total investment securities
    -       (65 )     -       (65 )     -       2       -       2  
                                                                 
Loans, notes and mortgages
    -       (61 )     -       (61 )     -       124       -       124  
Liabilities:
                                                               
Trading liabilities, excluding derivative contracts:
                                                               
Corporate debt
    1       -       -       1       -       -       -       -  
Preferred stock
    2       -       -       2       2       -       -       2  
Municipals, money markets and other
    (1 )     -       -       (1 )     (1 )     -       -       (1 )
                                                                 
Total trading liabilities, excluding derivative contracts
    2       -       -       2       1       -       -       1  
                                                                 
Other payables — interest and other
    -       (1 )     -       (1 )     -       1       -       1  
Long-term borrowings
    331       18       -       349       229       (9 )     -       220  
 
 


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Net unrealized gains in principal transactions related to derivative contracts, net were primarily due to credit spreads widening on short CDS baskets in the third quarter of 2011.
 
                                                                 
(dollars in millions)
    Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
    Three Months Ended September 30, 2010   Nine Months Ended September 30, 2010
    Principal
  Other
          Principal
  Other
       
    Transactions   Revenue   Interest   Total   Transactions   Revenue   Interest   Total
 
 
Assets:
                                                               
Trading assets, excluding derivative contracts:
                                                               
Equities
  $ (3 )   $ -     $ -     $ (3 )   $ (6 )   $ -     $ -     $ (6 )
Non-U.S. governments and agencies
    22       -       -       22       (133 )     -       -       (133 )
Corporate debt
    82       -       -       82       175       -       -       175  
Preferred stock
    2       -       -       2       (23 )     -       -       (23 )
Mortgages, mortgage-backed and asset-backed
    78       -       -       78       116       -       -       116  
Municipals and money markets
    28       -       -       28       44       -       -       44  
                                                                 
                                                                 
Total trading assets, excluding derivative contracts
    209       -       -       209       173       -       -       173  
                                                                 
Derivative contracts, net
    (189 )     -       -       (189 )     (779 )     -       -       (779 )
Investment securities available-for-sale:
                                                               
Mortgage-backed securities - non-agency MBSs
    -       (20 )     -       (20 )     -       (42 )     24       (18 )
                                                                 
Total investment securities available-for-sale
    -       (20 )     -       (20 )     -       (42 )     24       (18 )
                                                                 
Investment securities non-qualifying
    -       (249 )     -       (249 )     -       233       -       233  
                                                                 
Total investment securities
    -       (269 )     -       (269 )     -       191       24       215  
                                                                 
Loans, notes and mortgages
    -       287       -       287       -       248       -       248  
Liabilities:
                                                               
Trading liabilities, excluding derivative contracts:
                                                               
Non-U.S. governments and agencies
    29       -       -       29       52       -       -       52  
                                                                 
Total trading liabilities, excluding derivative contracts
    29       -       -       29       52       -       -       52  
                                                                 
Other payables — interest and other
    -       16       -       16       -       27       -       27  
Long-term borrowings
    (113 )     (103 )     -       (216 )     381       88       -       469  
 
 
 
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 tables show the fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2011 and December 31, 2010, respectively.
 
                                                                 
(dollars in millions)
                    Gains/(Losses)   Gains/(Losses)   Gains/(Losses)   Gains/(Losses)
                    Three Months
  Nine Months
  Three Months
  Nine Months
    Non-Recurring Basis
  Ended
  Ended
  Ended
  Ended
    as of September 30, 2011   September 30,
  September 30,
  September 30,
  September 30,
    Level 1   Level 2   Level 3   Total   2011   2011   2010   2010
 
 
Assets:
                                                               
Investment securities non-qualifying
  $ -     $ -     $ 34     $ 34     $ -     $  (5 )   $ -     $  (13 )
Loans, notes and mortgages
    -       565       322       887       (43 )     1       113       (79 )
Other assets
    -       -       15       15       -       (7 )     (20 )     (25 )
Liabilities:
                                                               
Other payables — interest and other
    -       -       19       19       -       (1 )     -       7  
 
 


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(dollars in millions)
    Non-Recurring Basis
    as of December 31, 2010
    Level 1   Level 2   Level 3   Total
 
Assets:
                               
Investment securities non-qualifying
  $ -     $ -     $ 85     $ 85  
Loans, notes and mortgages
    -       25       1,280       1,305  
Other assets
    -       10       35       45  
Liabilities:
                               
Other payables — interest and other
    -       -       31       31  
 
 
 
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 September 30, 2011 and December 31, 2010. 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 September 30, 2011 and December 31, 2010 primarily relate to commercial real estate loans that are classified as held for sale where there continues to be significant illiquidity in the loan trading and securitization markets.
 
Other payables — interest and other includes amounts recorded for loan commitments at lower of cost or fair value where the funded loan will be held for sale.
 
Fair Value Option Election
 
The fair value option election allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. The fair value option election is permitted on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. As discussed above, certain of Merrill Lynch’s financial instruments are required to be accounted for at 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 the line items in the Condensed Consolidated Statements of Earnings where changes in fair values of assets and liabilities, for which the fair value


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option election has been made, are included for the three and nine months ended September 30, 2011 and September 30, 2010.
 
                                                 
(dollars in millions)
    Changes in Fair Value For the
  Changes in Fair Value For the
    Three Months Ended September 30, 2011,
  Nine Months Ended September 30, 2011,
    for Items Measured
  for Items Measured
    at Fair Value Pursuant
  at Fair Value Pursuant
    to the Fair Value Option Election   to the 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   $ 169     $ -     $ 169     $ 197     $ -     $ 197  
Investment securities     -       (26 )     (26 )     -       4       4  
Loans(1)     (23 )     (114 )     (137 )     (23 )     25       2  
Liabilities:
                                               
Payables under repurchase agreements     (16 )     -       (16 )     (13 )     -       (13 )
Short-term borrowings     214       -       214       307       -       307  
Other payables — interest and other     -       (65 )     (65 )     -       (49 )     (49 )
Long-term borrowings     4,568       134       4,702       4,062       134       4,196  
 
 
 
(1) Effective July 1, 2011, includes certain loans accounted for under the fair value option that were reclassified from loans held for sale to trading assets because they are risk managed on that basis.
 
                                                 
(dollars in millions)
    Changes in Fair Value For the
  Changes in Fair Value For the
    Three Months Ended September 30, 2010
  Nine Months Ended September 30, 2010
    for Items Measured
  for Items Measured
    at Fair Value Pursuant
  at Fair Value Pursuant
    to the Fair Value Option Election   to the 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(1)   $ 54     $ -     $ 54     $ 73     $ -     $ 73  
Investment securities     -       16       16       -       62       62  
Loans, notes and mortgages     -       302       302       -       396       396  
Liabilities:
                                               
Payables under repurchase agreements     (2 )     -       (2 )     18       -       18  
Short-term borrowings     5       -       5       112       -       112  
Other payables — interest and other     -       2       2       -       4       4  
Long-term borrowings(2)     (1,243 )     (82 )     (1,325 )     1,238       (102 )     1,136  
 
 
 
(1) Changes in fair value for the three months ended September 30, 2010 were revised from approximately $49 million (as previously reported) to approximately $54 million. Changes in fair value for the nine months ended September 30, 2010 were revised from approximately $50 million (as previously reported) to approximately $73 million.


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(2) 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 elected the fair value option 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 and loan commitments
 
Merrill Lynch made the fair value option election for certain loans that 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 changes in the fair value of loans and commitments, for which the fair value option was elected, that were attributable to changes in borrower-specific credit risk were not material for the three and nine months ended September 30, 2011 and September 30, 2010.
 
As of September 30, 2011 and December 31, 2010, the aggregate fair value of loans for which the fair value option election has been made that were 90 days or more past due was $26 million and $32 million, respectively, and the aggregate fair value of loans that were in non-accrual status was $26 million and $32 million, respectively. As of September 30, 2011 and December 31, 2010, the unpaid principal amount due exceeded the aggregate fair value of such loans that are 90 days or more past due and/or in non-accrual status by $129 million and $173 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 (e.g., structured notes) and/or for which hedge accounting under Derivatives Accounting had been difficult to obtain. The majority of the fair value changes on long-term borrowings are 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 nine months ended September 30, 2011 and September 30, 2010 related to changes in Merrill Lynch’s credit spreads, the majority of the gains (losses) for the respective periods are offset by gains (losses) on derivatives that economically hedge these borrowings and that are accounted for at fair value under Derivatives Accounting. The changes in the fair value of liabilities for which the fair value option election was made that were attributable to changes in Merrill Lynch’s credit spreads were gains of approximately $2.9 billion and $2.7 billion for the three and nine months ended September 30, 2011, respectively, and losses of approximately $0.3 billion and gains of approximately $1.1 billion for the three and nine months ended September 30, 2010, respectively. Changes in Merrill Lynch specific credit risk are derived by isolating fair value changes due to changes in Merrill Lynch’s credit spreads as observed in the secondary cash market.
 
The fair value option election was also made for certain non-recourse long-term borrowings and secured borrowings issued by consolidated VIEs. The fair value of these borrowings is not materially affected by changes in Merrill Lynch’s creditworthiness.


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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 and long-term borrowings for which the fair value option election has been made as of September 30, 2011 and December 31, 2010.
 
                         
(dollars in millions)
        Principal
   
    Fair Value
  Amount
   
    at
  Due Upon
   
    September 30, 2011   Maturity   Difference
 
 
Assets:
                       
Receivables under resale agreements
  $ 89,119     $ 88,644     $ 475  
Receivables under securities borrowed transactions
    1,543       1,735       (192 )
Loans(1)
    2,892       4,230       (1,338 )
Liabilities:
                       
Long-term borrowings(2)
    31,021       38,554       (7,533 )
 
 
(1) Includes $493 million of loans held for sale accounted for under the fair value option that were reclassified to trading assets because they are risk managed on that basis.
 
(2) The majority of the difference between the fair value and principal amount due upon maturity at September 30, 2011 relates to the impact of widening of Merrill Lynch’s credit spreads, as well as the fair value of the embedded derivative, where applicable.
 
                         
(dollars in millions)
        Principal
   
    Fair Value
  Amount
   
    at
  Due Upon
   
    December 31, 2010   Maturity   Difference
 
 
Assets:
                       
Receivables under resale agreements(1)
  $ 74,255     $ 73,941     $ 314  
Receivables under securities borrowed transactions
    1,672       1,672       -  
Loans, notes and mortgages
    3,190       4,518       (1,328 )
Liabilities:
                       
Long-term borrowings(2)
    39,214       43,014       (3,800 )
 
 
(1) The fair value and principal amount due upon maturity of receivables under resale agreements have been revised from approximately $51 billion for each (as previously reported) to approximately $74 billion.
 
(2) The majority of the difference relates to the impact of the widening of Merrill Lynch’s credit spreads since issuance and the change in fair value of non-recourse debt issued by consolidated VIEs.
 
Note 5.  Fair Value of Financial Instruments
 
The fair values of financial instruments have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimated fair values. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of Merrill Lynch.
 
The following disclosures represent financial instruments for which the ending balances at September 30, 2011 and December 31, 2010 are not carried at fair value in their entirety on Merrill Lynch’s Condensed Consolidated Balance Sheets.


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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 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.
 
Deposits
 
The fair value for certain deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of Merrill Lynch’s long-term relationships with depositors.
 
Long-term Borrowings
 
Merrill Lynch uses quoted market prices for its long-term borrowings when available. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for Merrill Lynch debt with similar maturities. Merrill Lynch made the fair value option election for certain long-term borrowings, including structured notes. See Note 4 for additional information.
 
The book and fair values of certain financial instruments at September 30, 2011 and December 31, 2010 were as follows:
 
                                 
(dollars in millions)
    September 30, 2011   December 31, 2010
    Book Value   Fair Value   Book Value   Fair Value
 
 
Financial assets
                               
Loans, notes and mortgages(1)
  $ 21,916     $ 21,150     $ 25,803     $ 24,383  
Financial liabilities
                               
Deposits
    12,277       12,277       12,826       12,826  
Long-term borrowings(2)
    118,511       111,781       132,427       131,694  
 
 
(1) Loans are presented net of the allowance for loan losses.
 
(2) Includes junior subordinated notes (related to trust preferred securities).
 
Note 6.  Derivatives
 
A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity security prices, currencies, commodity prices or credit spreads. Derivatives include futures, forwards, swaps, option contracts, and other financial instruments with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest rate swaps or currency forwards) or


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to purchase or sell other financial instruments at specified terms on a specified date (e.g., options to buy or sell securities or currencies).
 
Derivatives Accounting establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (“embedded derivatives”) and for hedging activities. Derivatives Accounting requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. The fair value of all derivatives is recorded on a net-by-counterparty basis on the Condensed Consolidated Balance Sheets where Merrill Lynch believes a legal right of setoff exists under an enforceable netting agreement. All derivatives, 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 trading and financing purposes, and to manage risk exposures arising from trading assets and liabilities. Changes in fair value for these derivatives are reported in current period earnings as principal transactions revenues.
 
Derivatives that contain a significant financing element
 
In the ordinary course of trading activities, Merrill Lynch enters into certain transactions that are documented as derivatives where a significant cash investment is made by one party. Certain derivative instruments that contain a significant financing element at inception and where Merrill Lynch is deemed to be the borrower are included in financing activities in the Condensed Consolidated Statements of Cash Flows. The cash flows from all other derivative transactions that do not contain a significant financing element at inception are included in operating activities.
 
Non-trading derivatives
 
Merrill Lynch also enters into derivatives in order to manage risk exposures arising from assets and liabilities not carried at fair value as follows:
 
1.  Merrill Lynch’s debt was issued in a variety of maturities and currencies to achieve the lowest cost financing possible. Merrill Lynch enters into derivative transactions to hedge these liabilities. Derivatives used most frequently include swap agreements that:
 
  •  Convert fixed-rate interest payments into variable-rate interest payments;
 
  •  Change the underlying interest rate basis or reset frequency; and
 
  •  Change the settlement currency of a debt instrument.
 
Changes in the fair value of interest rate and foreign currency derivatives are reported in interest expense or other revenues when hedge accounting is applied; otherwise changes in fair value 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, a