Quarterly report pursuant to Section 13 or 15(d)

Fair Value Disclosures

v2.3.0.15
Fair Value Disclosures
9 Months Ended
Sep. 30, 2011
Fair Value Disclosures [Abstract]  
Fair Value Disclosures
 
Note 4.  Fair Value Disclosures
 
Fair Value Accounting
 
Fair Value Hierarchy
 
In accordance with Fair Value Accounting, Merrill Lynch has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy.
 
The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
 
Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
 
Level 1.   Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Merrill Lynch has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, U.S. Government securities, and certain other sovereign government obligations).
 
Level 2.   Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
 
  a)  Quoted prices for similar assets or liabilities in active markets (examples include restricted stock and U.S. agency securities);
 
  b)  Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which can trade infrequently);
 
  c)  Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
 
  d)  Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities and derivatives).
 
Level 3.   Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s view about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets and long-dated or complex derivatives).
 
As required by Fair Value Accounting, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (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 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.
 
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, 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 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  
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).
 
                                         
    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.
 
(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).
 
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.
 
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.
 
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  
 
 
 
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.
 
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  
 
 
 
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  
 
 
 
                                 
(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 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.
 
(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.
 
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.