Annual report pursuant to Section 13 and 15(d)

Investment Securities

v2.4.0.6
Investment Securities
 12 Months Ended
Dec. 31, 2011
Investments, Debt and Equity Securities [Abstract]  
Investment Securities
Note 8.
Investment Securities

Investment securities on the Consolidated Balance Sheets include:

•
Investments within the scope of Investment Accounting that are held by ML & Co. and certain of its non-broker-dealer subsidiaries consist of debt held-for-investment and liquidity and collateral management purposes that are classified as available-for-sale, and debt securities that Merrill Lynch intends to hold until maturity.

•
Non-qualifying investments are those that are not within the scope of Investment Accounting and consist principally of equity investments, including investments in partnerships and joint ventures. Included in non-qualifying investments are investments accounted for under the equity method of accounting, which consist of investments in (i) partnerships and certain limited liability corporations where Merrill Lynch has more than a minor influence (generally defined as three to five percent interest) and (ii) corporate entities where Merrill Lynch has the ability to exercise significant influence over the investee (generally defined as ownership and voting interest of 20% to 50%). Also included in non-qualifying investments are private equity investments that Merrill Lynch holds for capital appreciation and/or current income and which are accounted for at fair value in accordance with the Investment Company Guide, as well as private equity investments accounted for at fair value under the fair value option election.
Investment securities reported on the Consolidated Balance Sheets at December 31, 2011 and December 31, 2010 are presented below.
(dollars in millions)
 
December 31, 2011
 
 
December 31, 2010
Investment securities
 

 
 
 

Available-for-sale
$
694

 
 
$
5,091

Held-to-maturity
—

 
 
245

Non-qualifying(1)
 

 
 
 

Equity investments(2)
3,810

 
 
10,437

Other investments
2,180

 
 
1,996

Total
$
6,684

 
 
$
17,769

 
 
 
 
 
(1)
Investments that are non-qualifying for Investment Accounting purposes.
(2)
The December 31, 2010 balance included Merrill Lynch's investment in BlackRock, Inc. ("BlackRock"), which consisted of approximately 13.6 million preferred shares. The carrying value and fair value of this investment was $2.2 billion and $2.6 billion, respectively, at December 31, 2010. During the second quarter of 2011, Merrill Lynch sold its remaining investment in BlackRock, Inc., resulting in a pre-tax gain of $377 million.
For the years ended December 31, 2011, December 31, 2010 and December 31, 2009, OTTI losses related to non-agency mortgage-backed AFS securities were $69 million, $174 million, and $660 million respectively. Net impairment losses recognized in earnings represent the credit component of OTTI losses on AFS debt securities and total OTTI losses for AFS debt securities that Merrill Lynch does not intend to hold to recovery. Those amounts were $59 million, $172 million and $656 million for the years ended December 31, 2011, December 31, 2010 and December 31, 2009, respectively. Refer to Note 1 for Merrill Lynch's accounting policy regarding OTTI of investment securities.
Information regarding investment securities subject to Investment Accounting follows.
(dollars in millions)
 
December 31, 2011
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-Sale
 

 
 

 
 

 
 

Securities, mortgage-backed and asset-backed:
 

 
 

 
 

 
 

Corporate ABS
$
47

 
$
—

 
$
—

 
$
47

Non-agency mortgage backed securities
249

 
—

 
—

 
249

Subtotal
296

 
—

 
—

 
296

U.S. Government and agencies
398

 
—

 
—

 
398

Total available-for-sale securities
$
694

 
$
—

 
$
—

 
$
694

 
 
 
 
 
 
 
 
(dollars in millions)
 
December 31, 2010
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Available-for-Sale
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

Agency residential mortgage backed securities
$
3,918

 
$
—

 
$
(49
)
 
$
3,869

Agency collateralized mortgage obligations
61

 
—

 
—

 
61

Non-agency collateralized mortgage obligations
739

 
68

 
(76
)
 
731

Subtotal
4,718

 
68

 
(125
)
 
4,661

U.S. Government and agencies
430

 
—

 
—

 
430

Total available-for-sale securities
5,148

 
68

 
(125
)
 
5,091

Held-to-Maturity
 

 
 

 
 

 
 

Corporate debt and municipal
245

 
—

 
—

 
245

Total
$
5,393

 
$
68

 
$
(125
)
 
$
5,336

 
 
 
 
 
 
 
 

There were no individual securities that have been in a continuous unrealized loss position at December 31, 2011. The following table presents fair value and unrealized losses, after hedges, for available-for-sale securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2010.
(dollars in millions)
 
Less than 1 Year
 
More than 1 Year
 
Total
Asset Category
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
Agency residential mortgage backed securities
$
3,869

 
$
(49
)
 
$
—

 
$
—

 
$
3,869

 
$
(49
)
Non-agency collateralized mortgage obligations
53

 
(3
)
 
230

 
(73
)
 
283

 
(76
)
Total
$
3,922

 
$
(52
)
 
$
230

 
$
(73
)
 
$
4,152

 
$
(125
)
 
 
 
 
 
 
 
 
 
 
 
 

The amortized cost and fair value of available-for-sale debt securities by expected maturity for mortgage-backed securities and contractual maturity for other debt securities at December 31, 2011 are as follows:
(dollars in millions)
 
Available-for-Sale
 
 
Amortized
Cost
 
Fair
Value
 
Due in one year or less
$
631

 
$
631

 
Due after one year through five years
63

 
63

 
Due after five years through ten years
—

 
—

 
Due after ten years
—

 
—

 
Total(1)
$
694

 
$
694

 
 
 
 
 
 
(1)
Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay their obligations with or without prepayment penalties.
The proceeds and gross realized gains (losses) from the sale of available-for-sale securities during the years ended December 31, 2011, December 31, 2010 and December 31, 2009 are as follows:
(dollars in millions)
 
Year Ended
December 31, 2011
 
Year Ended
December 31, 2010
 
Year Ended
December 31, 2009
Proceeds
$
4,290

 
$
15,472

 
$
13,715

Gross realized gains
69

 
531

 
608

Gross realized losses
(76
)
 
(272
)
 
(93
)
 
 
 
 
 
 
Equity Method Investments
At December 31, 2011 and December 31, 2010, Merrill Lynch held certain investments that were accounted for under the equity method of accounting.
On December 1, 2009, BlackRock completed its purchase of Barclays Global Investors from Barclays, Plc. This acquisition had the effect of diluting Merrill Lynch’s ownership interest in BlackRock, which for accounting purposes was treated as a sale of a portion of Merrill Lynch’s ownership interest. As a result, upon the closing of this transaction, Merrill Lynch recorded an adjustment to its investment in BlackRock, which resulted in a pre-tax gain of $1.1 billion, which is included within Earnings from equity method investments in the Consolidated Statement of (Loss) Earnings for the year ended December 31, 2009. In addition, Merrill Lynch’s economic interest in BlackRock was reduced from approximately 50% to approximately 34%.
On November 15, 2010, Merrill Lynch sold 51.2 million shares of BlackRock common stock. The net proceeds to Merrill Lynch from the sale of these shares, after underwriting discounts and before offering expenses payable by Merrill Lynch, were approximately $8.2 billion. As a result of the sale, Merrill Lynch owned shares of BlackRock Series B Preferred Stock only, and Merrill Lynch’s economic interest in BlackRock was reduced from approximately 34% to approximately 7%. Merrill Lynch recorded a pre-tax gain of approximately $90 million from this transaction, which is included within Earnings from equity method investments in the Consolidated Statement of (Loss) Earnings for the year ended December 31, 2010.
In June 2011, Merrill Lynch sold the remaining shares of BlackRock's Series B preferred stock, resulting in a pre-tax gain of $377 million, which is included within Other Revenues in the Consolidated Statement of (Loss) Earnings for the year ended December 31, 2011. As of December 31, 2011, Merrill Lynch no longer held an economic interest in BlackRock.
Summarized aggregate financial information for Merrill Lynch's most significant equity method investees (BlackRock, Warburg Pincus Funds IX and X, L.P. and WCG Master Fund Ltd.) is as follows:
(dollars in millions)
 
 
 
For the Year Ended
For the Year Ended
 
December 31, 2010 (1)
December 31, 2009 (2)
Revenues
$
8,612

$
6,576

Operating income
2,998

2,774

Earnings before income taxes
3,021

2,768

Net earnings
2,063

2,371

(1) Consists of the results of BlackRock for the year ended December 31, 2010. BlackRock was accounted for under the equity method of accounting through November 15, 2010.
(2) Amounts related to BlackRock are as follows: Revenues $4,700 million, Operating income $1,278 million, Earnings before income taxes $1,272 million and Net earnings $875 million.

Such investments were exited or not material for the year ended December 31, 2011.