Quarterly report pursuant to Section 13 or 15(d)

Fair Value of Financial Instruments

Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2011
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments
Note 5.  Fair Value of Financial Instruments
The fair values of financial instruments have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimated fair values. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of Merrill Lynch.
The following disclosures represent financial instruments for which the ending balances at September 30, 2011 and December 31, 2010 are not carried at fair value in their entirety on Merrill Lynch’s Condensed Consolidated Balance Sheets.
Short-term Financial Instruments
The carrying value of short-term financial instruments, including cash and cash equivalents, cash and securities segregated for regulatory purposes or deposited with clearing organizations, certain securities financing transactions, customer and broker-dealer receivables and payables, and other short-term borrowings, approximates the fair value of these instruments. These financial instruments generally expose Merrill Lynch to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market interest rates.
Loans, Notes and Mortgages
Fair values were generally determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that Merrill Lynch believes a market participant would consider in determining fair value. Merrill Lynch estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate its best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan. Merrill Lynch made the fair value option election for certain loans and loan commitments. See Note 4 for additional information.
The fair value for certain deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of Merrill Lynch’s long-term relationships with depositors.
Long-term Borrowings
Merrill Lynch uses quoted market prices for its long-term borrowings when available. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for Merrill Lynch debt with similar maturities. Merrill Lynch made the fair value option election for certain long-term borrowings, including structured notes. See Note 4 for additional information.
The book and fair values of certain financial instruments at September 30, 2011 and December 31, 2010 were as follows:
(dollars in millions)
    September 30, 2011   December 31, 2010
    Book Value   Fair Value   Book Value   Fair Value
Financial assets
Loans, notes and mortgages(1)
  $ 21,916     $ 21,150     $ 25,803     $ 24,383  
Financial liabilities
    12,277       12,277       12,826       12,826  
Long-term borrowings(2)
    118,511       111,781       132,427       131,694  
(1) Loans are presented net of the allowance for loan losses.
(2) Includes junior subordinated notes (related to trust preferred securities).