Quarterly report pursuant to Section 13 or 15(d)

Commitments and Contingencies

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Commitments and Contingencies
 3 Months Ended
Mar. 31, 2012
Commitments and Contingencies Disclosure [Abstract]  
Commitments and Contingencies Disclosure
NOTE 10 – Commitments and Contingencies

In the normal course of business, the Corporation enters into a number of off-balance sheet commitments. These commitments expose the Corporation to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Corporation’s Consolidated Balance Sheet. For additional information on commitments and contingencies, see Note 14 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2011 Annual Report on Form 10-K.

Credit Extension Commitments

The Corporation enters into commitments to extend credit such as loan commitments, standby letters of credit and commercial letters of credit to meet the financing needs of its customers. The Credit Extension Commitments table includes the notional amount of unfunded legally binding lending commitments net of amounts distributed (e.g., syndicated) to other financial institutions of $25.3 billion and $27.1 billion at March 31, 2012 and December 31, 2011. At March 31, 2012, the carrying amount of these commitments, excluding commitments accounted for under the fair value option, was $676 million, including deferred revenue of $25 million and a reserve for unfunded lending commitments of $651 million. At December 31, 2011, the comparable amounts were $741 million, $27 million and $714 million, respectively. The carrying amount of these commitments is classified in accrued expenses and other liabilities on the Consolidated Balance Sheet.

The table below also includes the notional amount of commitments of $24.0 billion and $25.7 billion at March 31, 2012 and December 31, 2011 that are accounted for under the fair value option. However, the table below excludes fair value adjustments of $844 million and $1.2 billion on these commitments, which are classified in accrued expenses and other liabilities. For information regarding the Corporation’s loan commitments accounted for under the fair value option, see Note 16 – Fair Value Option.

Credit Extension Commitments
 
 
 
March 31, 2012
(Dollars in millions)
Expire in One
Year or Less
 
Expire After One
Year Through
Three Years
 
Expire After Three Years Through
Five Years
 
Expire After Five
Years
 
Total
Notional amount of credit extension commitments
 
 
 
 
 
 
 
 
 
Loan commitments
$
98,539

 
$
80,400

 
$
125,963

 
$
15,590

 
$
320,492

Home equity lines of credit
1,822

 
9,016

 
21,715

 
33,521

 
66,074

Standby letters of credit and financial guarantees (1)
28,846

 
18,026

 
6,414

 
2,854

 
56,140

Letters of credit
2,147

 
49

 
19

 
1,021

 
3,236

Legally binding commitments
131,354

 
107,491

 
154,111

 
52,986

 
445,942

Credit card lines (2)
441,367

 
—

 
—

 
—

 
441,367

Total credit extension commitments
$
572,721

 
$
107,491

 
$
154,111

 
$
52,986

 
$
887,309

 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
Notional amount of credit extension commitments
 
 
 
 
 
 
 
 
 
Loan commitments
$
96,291

 
$
85,413

 
$
120,770

 
$
15,009

 
$
317,483

Home equity lines of credit
1,679

 
7,765

 
20,963

 
37,066

 
67,473

Standby letters of credit and financial guarantees (1)
26,965

 
18,932

 
6,433

 
5,505

 
57,835

Letters of credit
2,828

 
27

 
5

 
383

 
3,243

Legally binding commitments
127,763

 
112,137

 
148,171

 
57,963

 
446,034

Credit card lines (2)
449,097

 
—

 
—

 
—

 
449,097

Total credit extension commitments
$
576,860

 
$
112,137

 
$
148,171

 
$
57,963

 
$
895,131

(1) 
The notional amounts of standby letters of credit and financial guarantees classified as investment grade and non-investment grade based on the credit quality of the underlying reference name within the instrument were $38.8 billion and $16.7 billion at March 31, 2012, and $39.2 billion and $17.8 billion at December 31, 2011. Amounts include consumer standby letters of credit of $656 million and $859 million at March 31, 2012 and December 31, 2011.
(2) 
Includes business card unused lines of credit.

Legally binding commitments to extend credit generally have specified rates and maturities. Certain of these commitments have adverse change clauses that help to protect the Corporation against deterioration in the borrower’s ability to pay.

Other Commitments

Global Principal Investments and Other Equity Investments

At March 31, 2012 and December 31, 2011, the Corporation had unfunded equity investment commitments of $520 million and $772 million. In light of proposed Basel regulatory capital changes related to unfunded commitments, over the past two years, the Corporation has actively reduced these commitments in a series of sale transactions involving its private equity investments.

Other Commitments

At March 31, 2012 and December 31, 2011, the Corporation had commitments to purchase loans (e.g., residential mortgage and commercial real estate) of $3.8 billion and $2.5 billion, which upon settlement will be included in loans or LHFS.

At March 31, 2012 and December 31, 2011, the Corporation had commitments to enter into forward-dated resale and securities borrowing agreements of $89.4 billion and $67.0 billion. In addition, the Corporation had commitments to enter into forward-dated repurchase and securities lending agreements of $64.2 billion and $42.0 billion. All of these commitments expire within the next 12 months.

The Corporation is a party to operating leases for certain of its premises and equipment. Commitments under these leases are approximately $2.3 billion, $2.7 billion, $2.1 billion, $1.7 billion and $1.4 billion for the remainder of 2012 and the years through 2016, respectively, and $6.5 billion in the aggregate for all years thereafter.

The Corporation has entered into agreements with providers of market data, communications, systems consulting and other office-related services. At March 31, 2012 and December 31, 2011, the minimum fee commitments over the remaining terms of these agreements totaled $1.8 billion and $1.9 billion.

Other Guarantees

Bank-owned Life Insurance Book Value Protection

The Corporation sells products that offer book value protection to insurance carriers who offer group life insurance policies to corporations, primarily banks. The book value protection is provided on portfolios of intermediate investment-grade fixed-income securities and is intended to cover any shortfall in the event that policyholders surrender their policies and market value is below book value. To manage its exposure, the Corporation imposes significant restrictions on surrenders and the manner in which the portfolio is liquidated and the funds are accessed. In addition, investment parameters of the underlying portfolio are restricted. These constraints, combined with structural protections, including a cap on the amount of risk assumed on each policy, are designed to provide adequate buffers and guard against payments even under extreme stress scenarios. These guarantees are recorded as derivatives and carried at fair value in the trading portfolio. At both March 31, 2012 and December 31, 2011, the notional amount of these guarantees totaled $15.8 billion and the Corporation’s maximum exposure related to these guarantees totaled $5.1 billion with estimated maturity dates between 2030 and 2040. As of March 31, 2012, the Corporation had not made a payment under these products. The possibility of surrender or other payment associated with these guarantees exists. The net fair value of the fee receivable associated with these guarantees was $44 million and $48 million at March 31, 2012 and December 31, 2011 and reflects the probability of surrender as well as the multiple structural protection features in the contracts.

Employee Retirement Protection

The Corporation sells products that offer book value protection primarily to plan sponsors of Employee Retirement Income Security Act of 1974 (ERISA) governed pension plans, such as 401(k) plans and 457 plans. The book value protection is provided on portfolios of intermediate/short-term investment-grade fixed-income securities and is intended to cover any shortfall in the event that plan participants continue to withdraw funds after all securities have been liquidated and there is remaining book value. The Corporation retains the option to exit the contract at any time. If the Corporation exercises its option, the purchaser can require the Corporation to purchase high-quality fixed-income securities, typically government or government-backed agency securities, with the proceeds of the liquidated assets to assure the return of principal. To manage its exposure, the Corporation imposes significant restrictions and constraints on the timing of the withdrawals, the manner in which the portfolio is liquidated and the funds are accessed, and the investment parameters of the underlying portfolio. These constraints, combined with structural protections, are designed to provide adequate buffers and guard against payments even under extreme stress scenarios. These guarantees are recorded as derivatives and carried at fair value in the trading portfolio. At March 31, 2012 and December 31, 2011, the notional amount of these guarantees totaled $27.5 billion and $28.8 billion with estimated maturity dates up to 2015 if the exit option is exercised on all deals. As of March 31, 2012, the Corporation had not made a payment under these products.

Merchant Services

In accordance with credit and debit card association rules, the Corporation sponsors merchant processing servicers that process credit and debit card transactions on behalf of various merchants. In connection with these services, a liability may arise in the event of a billing dispute between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor. If the merchant defaults on its obligation to reimburse the cardholder, the cardholder, through its issuing bank, generally has until six months after the date of the transaction to present a chargeback to the merchant processor, which is primarily liable for any losses on covered transactions. However, if the merchant processor fails to meet its obligation to reimburse the cardholder for disputed transactions, then the Corporation, as the sponsor, could be held liable for the disputed amount. For the three months ended March 31, 2012 and 2011, the sponsored entities processed and settled $133.2 billion and $84.9 billion of transactions and recorded losses of $2 million and $3 million. A significant portion of this activity was processed by a joint venture in which the Corporation holds a 49 percent ownership. At March 31, 2012 and December 31, 2011, the sponsored merchant processing servicers held as collateral $219 million and $238 million of merchant escrow deposits which may be used to offset amounts due from the individual merchants.

The Corporation believes the maximum potential exposure for chargebacks would not exceed the total amount of merchant transactions processed through Visa, MasterCard and Discover for the last six months, which represents the claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of March 31, 2012 and December 31, 2011, the maximum potential exposure for sponsored transactions totaled approximately $244.0 billion and $236.0 billion. However, the Corporation believes that the maximum potential exposure is not representative of the actual potential loss exposure and does not expect to make material payments in connection with these guarantees.

Other Derivative Contracts

The Corporation funds selected assets, including securities issued by CDOs and CLOs, through derivative contracts, typically total return swaps, with third parties and VIEs that are not consolidated on the Corporation’s Consolidated Balance Sheet. At March 31, 2012 and December 31, 2011, the total notional amount of these derivative contracts was $3.3 billion and $3.2 billion with commercial banks and $1.7 billion and $1.8 billion with VIEs. The underlying securities are senior securities and substantially all of the Corporation’s exposures are insured. Accordingly, the Corporation’s exposure to loss consists principally of counterparty risk to the insurers. In certain circumstances, generally as a result of ratings downgrades, the Corporation may be required to purchase the underlying assets, which would not result in additional gain or loss to the Corporation as such exposure is already reflected in the fair value of the derivative contracts.

Other Guarantees

The Corporation sells products that guarantee the return of principal to investors at a preset future date. These guarantees cover a broad range of underlying asset classes and are designed to cover the shortfall between the market value of the underlying portfolio and the principal amount on the preset future date. To manage its exposure, the Corporation requires that these guarantees be backed by structural and investment constraints and certain pre-defined triggers that would require the underlying assets or portfolio to be liquidated and invested in zero-coupon bonds that mature at the preset future date. The Corporation is required to fund any shortfall between the proceeds of the liquidated assets and the purchase price of the zero-coupon bonds at the preset future date. These guarantees are recorded as derivatives and carried at fair value in the trading portfolio. The notional amount of these guarantees decreased from $300 million at December 31, 2011 to $135 million at March 31, 2012 due to maturities. These guarantees have various maturities ranging from two to five years. As of March 31, 2012, the Corporation had not made a payment under these products and has assessed the probability of payments under these guarantees as remote.

The Corporation has entered into additional guarantee agreements and commitments, including lease-end obligation agreements, partial credit guarantees on certain leases, real estate joint venture guarantees, sold risk participation swaps, divested business commitments and sold put options that require gross settlement. The maximum potential future payment under these agreements was approximately $3.5 billion and $3.7 billion at March 31, 2012 and December 31, 2011. The estimated maturity dates of these obligations extend up to 2033. The Corporation has made no material payments under these guarantees.

In the normal course of business, the Corporation periodically guarantees the obligations of its affiliates in a variety of transactions including ISDA-related transactions and non ISDA-related transactions such as commodities trading, repurchase agreements, prime brokerage agreements and other transactions.

Payment Protection Insurance Claims Matter

In the U.K., the Corporation sells payment protection insurance (PPI) through its international card services business to credit card customers and has previously sold this insurance to consumer loan customers. PPI covers a consumer's loan or debt repayment if certain events occur such as loss of job or illness. In response to an elevated level of customer complaints across the industry, heightened media coverage and pressure from consumer advocacy groups, the U.K. Financial Services Authority (FSA) investigated and raised concerns about the way some companies have handled complaints related to the sale of these insurance policies. In connection with this matter, the Corporation established a reserve for PPI. The reserve was $534 million and $476 million at March 31, 2012 and December 31, 2011, with the increase due to a provision of $200 million partially offset by payment of claims during the three months ended March 31, 2012.

Litigation and Regulatory Matters

The following supplements the disclosure in Note 14 – Commitments and Contingencies to the Consolidated Financial Statements of the Corporation's 2011 Annual Report on Form 10-K (the prior commitments and contingencies disclosure).
In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to many pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of consumer protection, securities, environmental, banking, employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Corporation and its subsidiaries.
In the ordinary course of business, the Corporation and its subsidiaries are also subject to regulatory examinations, information gathering requests, inquiries and investigations. Certain subsidiaries of the Corporation are registered broker/dealers or investment advisors and are subject to regulation by the SEC, the Financial Industry Regulatory Authority, the New York Stock Exchange, the FSA and other domestic, international and state securities regulators. In connection with formal and informal inquiries by those agencies, such subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their regulated activities.
In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Corporation generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be.
In accordance with applicable accounting guidance, the Corporation establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Corporation does not establish an accrued liability. As a litigation or regulatory matter develops, the Corporation, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. If, at the time of evaluation, the loss contingency related to a litigation or regulatory matter is not both probable and estimable, the matter will continue to be monitored for further developments that would make such loss contingency both probable and estimable. Once the loss contingency related to a litigation or regulatory matter is deemed to be both probable and estimable, the Corporation will establish an accrued liability with respect to such loss contingency and record a corresponding amount of litigation-related expense. The Corporation continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established. Excluding expenses of internal or external legal service providers, litigation-related expense of $793 million was recognized for the three months ended March 31, 2012 compared to $940 million for the same period in 2011.
For a limited number of the matters disclosed in this Note, and in the prior commitments and contingencies disclosure, for which a loss is probable or reasonably possible in future periods, whether in excess of a related accrued liability or where there is no accrued liability, the Corporation is able to estimate a range of possible loss. In determining whether it is possible to provide an estimate of loss or range of possible loss, the Corporation reviews and evaluates its material litigation and regulatory matters on an ongoing basis, in conjunction with any outside counsel handling the matter, in light of potentially relevant factual and legal developments. These may include information learned through the discovery process, rulings on dispositive motions, settlement discussions, and other rulings by courts, arbitrators or others. In cases in which the Corporation possesses sufficient appropriate information to develop an estimate of loss or range of possible loss, that estimate is aggregated and disclosed below. There may be other disclosed matters for which a loss is probable or reasonably possible but such an estimate may not be possible. For those matters where an estimate is possible, management currently estimates the aggregate range of possible loss is $0 to $4.2 billion in excess of the accrued liability (if any) related to those matters. This estimated range of possible loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated range will change from time to time, and actual results may vary significantly from the current estimate. Those matters for which an estimate is not possible are not included within this estimated range. Therefore, this estimated range of possible loss represents what the Corporation believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Corporation's maximum loss exposure. Information is provided below, or in the prior commitments and contingencies disclosure, regarding the nature of all of these contingencies and, where specified, the amount of the claim associated with these loss contingencies. Based on current knowledge, management does not believe that loss contingencies arising from pending matters, including the matters described herein, and in the prior commitments and contingencies disclosure, will have a material adverse effect on the consolidated financial position or liquidity of the Corporation. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Corporation's control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Corporation's results of operations or cash flows for any particular reporting period.
Fontainebleau Las Vegas Litigation
On March 19, 2012, the district court granted BANA's motion for summary judgment on all causes of action against it in its capacity as disbursement agent in Avenue CLO Fund Ltd., et al. v. Bank of America, N.A., Merrill Lynch Capital Corporation, et al., and denied plaintiffs' motion for summary judgment. Plaintiffs have filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit.
Merrill Lynch Acquisition-related Matters
Securities Actions
In Dornfest v. Bank of America Corp., et al., on March 21, 2012, the U.S. Court of Appeals for the Second Circuit denied without prejudice plaintiff's attempt to appeal the district court's ruling that plaintiff could not proceed with his action on a class basis.
Derivative Actions
In In re Bank of America Securities, Derivative and Employment Retirement Income Security Act (ERISA) Litigation pending in the U.S. District Court for the Southern District of New York, the parties to the derivative action have reached an agreement in principle to settle this action, which requires judicial approval. If the agreement in principle is approved by the court, the action pending in New York will be dismissed. Final judicial approval of the settlement will entitle defendants to the dismissal of all similar derivative actions, including the derivative action pending in the Delaware Court of Chancery, In re Bank of America Corporation Stockholder Derivative Litigation. Plaintiffs in the Delaware Court of Chancery derivative action have filed motions in the Delaware Court of Chancery and federal court in New York challenging and seeking to enjoin the proposed settlement in the New York action on the ground that the consideration being paid to the Corporation is inadequate, among other grounds.
Montgomery
On March 15, 2012, plaintiffs moved to file a second amended complaint to add additional factual allegations. On March 16, 2012, the district court granted defendants' motion to dismiss the first amended complaint.
Mortgage-backed Securities Litigation
The Corporation and its affiliates, Countrywide entities and their affiliates, and Merrill Lynch entities and their affiliates have been named as defendants in a number of cases relating to their various roles as issuer, originator, seller, depositor, sponsor, underwriter and/or controlling entity in MBS offerings, pursuant to which the MBS investors were entitled to a portion of the cash flow from the underlying pools of mortgages. These cases generally include purported class action suits and actions by individual MBS purchasers. Although the allegations vary by lawsuit, these cases generally allege that the registration statements, prospectuses and prospectus supplements for securities issued by securitization trusts contained material misrepresentations and omissions, in violation of Sections 11, 12 and 15 of the Securities Act of 1933, Sections 10(b) and 20 of the Securities Exchange Act of 1934 and/or state securities laws and other state statutory and common laws.
These cases generally involve allegations of false and misleading statements regarding: (i) the process by which the properties that served as collateral for the mortgage loans underlying the MBS were appraised; (ii) the percentage of equity that mortgage borrowers had in their homes; (iii) the borrowers' ability to repay their mortgage loans; (iv) the underwriting practices by which those mortgage loans were originated; (v) the ratings given to the different tranches of MBS by rating agencies; and (vi) the validity of each issuing trust's title to the mortgage loans comprising the pool for that securitization (collectively, MBS Claims). Plaintiffs in these cases generally seek unspecified compensatory damages, unspecified costs and legal fees and, in some instances, seek rescission. A number of other entities (including the National Credit Union Administration) have threatened legal actions against the Corporation and its affiliates, Countrywide entities and their affiliates, and Merrill Lynch entities and their affiliates concerning MBS offerings.
On August 15, 2011, the Judicial Panel on Multi-district Litigation ordered multiple federal court cases involving Countrywide MBS consolidated for pretrial purposes in the U.S. District Court for the Central District of California, in a multi-district litigation entitled In re Countrywide Financial Corp. Mortgage-Backed Securities Litigation (the Countrywide RMBS MDL).
AIG Litigation
On April 24, 2012, the U.S. Court of Appeals for the Second Circuit granted plaintiffs' petition for leave to appeal the ruling of the federal district court in the Southern District of New York denying plaintiffs' motion to remand the case to New York Supreme Court.
Dexia Litigation
On March 9, 2012, plaintiffs filed an amended complaint asserting the same MBS Claims and seeking the same relief, and revising the successor liability allegations and adding fraudulent conveyance claims as to certain defendants.
FHFA Litigation
On April 5, 2012, the Federal Housing Finance Agency's motion to remand Federal Housing Finance Agency v. Countrywide Financial Corporation, et al. to New York Supreme Court was denied.
Luther Litigation and Related Actions
On March 9, 2012, the court dismissed the complaint in Putnam Bank v. Countrywide Financial Corporation, et al., as time-barred, with prejudice.
Sealink Litigation
On March 9, 2012, the court dismissed plaintiffs' complaint for lack of standing, without prejudice. On March 29, 2012, plaintiffs filed an amended complaint.
Mortgage Repurchase Litigation
Walnut Place Litigation
On March 29, 2012, the motion to dismiss filed on May 17, 2011 in Walnut Place LLC, et al. v. Countrywide Home Loans, Inc. et al. (Walnut I) was granted. Plaintiffs have appealed that decision.
In the second Walnut Place litigation, where a motion to dismiss is pending, also entitled Walnut Place LLC, et al. v. Countrywide Home Loans, Inc. et al., the parties have agreed to stay proceedings pending disposition of the appeal in Walnut I.
U.S. Bank Litigation
On April 5, 2012, the U.S. District Court for the Central District of California remanded the case to New York Supreme Court.

Mortgage Servicing Investigations and Litigation

On March 12, 2012, the Corporation and certain of its affiliates and subsidiaries, together with the U.S. Department of Justice, the U.S. Department of Housing and Urban Development and other federal agencies (together, the Federal Agencies) and 49 state attorneys general (the State AGs) caused a consent judgment (the Consent Judgment) concerning the terms of a global settlement resolving investigations into certain origination, servicing and foreclosure practices (the Global Settlement Agreement) to be filed in the U.S. District Court for the District of Columbia. The Global Settlement Agreement embodies the agreements related to the previously announced agreements in principle reached on February 9, 2012 with: (i) the Federal Agencies and State AGs to resolve federal and state investigations into certain origination, servicing and foreclosure practices; and (ii) the Federal Housing Administration (FHA) to resolve certain claims relating to the origination of FHA-insured mortgage loans, primarily by legacy Countrywide prior to and for a period following the Corporation's acquisition of that company. The Consent Judgment was entered by the court on April 5, 2012, and separate settlement agreements with the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency relating to servicing and foreclosure practices also became effective.