10-Q 1 ml-3312012x10q.htm FORM 10-Q ML-3.31.2012-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2012
 
 
OR
 
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from               to              

Commission file number: 1-7182

MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)

Delaware
13-2740599
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
Bank of America Corporate Center
 
100 N. Tryon Street
Charlotte, North Carolina
28255
(Address of principal executive offices)
(Zip Code)
(704) 386-5681
Registrant's telephone number, including area code

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

X     YES     __    NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

X     YES      __   NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer __
Accelerated filer __
Non-accelerated filer X
Smaller reporting company __
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

__    YES     X    NO

As of the close of business on May 3, 2012, there were 1,000 shares of Common Stock outstanding, all of which were held by Bank of America Corporation.

The Registrant is a wholly-owned subsidiary of Bank of America Corporation and meets the conditions set forth in General Instructions  H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced disclosure format as permitted by Instruction H(2).



QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012
TABLE OF CONTENTS
 
2 
 
 EX-12
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101


1


PART I - Financial Information

Item 1.
Financial Statements (Unaudited)

Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of (Loss) Earnings (Unaudited)
 
 
 
 
 
 
Three Months Ended
 
Three Months Ended
 
(dollars in millions)
March 31, 2012
 
March 31, 2011
 
Revenues
 

 
 

 
Principal transactions
$
(141
)
 
$
1,171

 
Commissions
1,355

 
1,590

 
Managed account and other fee-based revenues
1,287

 
1,291

 
Investment banking
1,204

 
1,532

 
Earnings from equity method investments
157

 
138

 
Intercompany service fee revenue from BAC
167

 
233

 
Other revenues
772

 
1,895

 
Other-than-temporary impairment losses on available-for-sale debt securities:
 
 
 

 
Total other-than-temporary impairment losses on AFS debt securities
(2
)
 
(38
)
 
Less: Portion of other-than-temporary impairment losses recognized in
 

 
 

 
OCI on AFS debt securities

 
1

 
Subtotal
4,799

 
7,813

 
Interest and dividend revenues
1,837

 
2,400

 
Less interest expense
1,907

 
2,353

 
Net interest (expense) income
(70
)
 
47

 
Revenues, net of interest expense
4,729

 
7,860

 
 
 
 
 
 
Non-interest expenses
 

 
 

 
Compensation and benefits
4,514

 
4,610

 
Communications and technology
439

 
428

 
Occupancy and related depreciation
305

 
336

 
Brokerage, clearing, and exchange fees
282

 
300

 
Advertising and market development
108

 
121

 
Professional fees
195

 
227

 
Office supplies and postage
28

 
32

 
Provision for representations and warranties
11

 
(22
)
 
Intercompany service fee expense from BAC
394

 
553

 
Other
305

 
654

 
Total non-interest expenses
6,581

 
7,239

 
Pre-tax (loss) earnings
(1,852
)
 
621

 
Income tax (benefit) expense
(224
)
 
215

 
Net (loss) earnings
$
(1,628
)
 
$
406

 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

2


Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
 
 
 
 
 
 
Three Months Ended
 
Three Months Ended
 
(dollars in millions)
March 31, 2012
 
March 31, 2011
 
Net (Loss) Earnings
$
(1,628
)
 
$
406

 
   Other comprehensive income (loss), net of tax:
 

 
 

 
      Foreign currency translation adjustment
14

 
2

 
      Net unrealized gains on investment securities available-for-sale

 
1

 
      Net deferred gains (losses) on cash flow hedges
3

 
(5
)
 
      Defined benefit pension and postretirement plans
35

 
4

 
        Total other comprehensive income, net of tax
52

 
2

 
Comprehensive (Loss) Income
$
(1,576
)
 
$
408

 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

3


Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(dollars in millions)
March 31,
2012
 
December 31,
2011
ASSETS
 
 
 
Cash and cash equivalents
$
10,789

 
$
13,731

Cash and securities segregated for regulatory purposes or deposited with clearing organizations
14,453

 
11,757

Securities financing transactions
 

 
 

Receivables under resale agreements (includes $90,998 in 2012 and $85,652 in 2011 measured at fair value in accordance with the fair value option election)
147,975

 
143,491

Receivables under securities borrowed transactions (includes $533 in 2012 and $259 in 2011 measured at fair value in accordance with the fair value option election)
67,367

 
58,109

 
215,342

 
201,600

Trading assets, at fair value (includes securities pledged as collateral that can be sold or repledged of $45,355 in 2012 and $34,932 in 2011):
 

 
 

Derivative contracts
29,214

 
35,013

Equities and convertible debentures
34,345

 
25,619

Non-U.S. governments and agencies
38,009

 
30,239

Corporate debt and preferred stock
18,649

 
17,305

Mortgages, mortgage-backed, and asset-backed
9,162

 
8,254

U.S. Government and agencies
51,742

 
43,003

Municipals, money markets, physical commodities and other
13,368

 
13,044

 
194,489

 
172,477

Investment securities (includes $209 in 2012 and $244 in 2011 measured at fair value in accordance with the fair value option election)
6,675

 
6,684

Securities received as collateral, at fair value
17,615

 
13,716

Receivables from Bank of America
42,837

 
50,972

Other receivables
 

 
 

Customers (net of allowance for doubtful accounts of $15 in 2012 and $15 in 2011)
22,566

 
20,512

Brokers and dealers
9,804

 
8,691

Interest and other
9,190

 
9,130

 
41,560

 
38,333

Loans, notes, and mortgages (net of allowances for loan losses of $75 in 2012 and $72 in 2011) (includes $2,774 in 2012 and $2,322 in 2011 measured at fair value in accordance with the fair value option election)
20,429

 
20,574

Equipment and facilities, net
1,383

 
1,385

Goodwill and intangible assets
10,014

 
10,079

Other assets
15,266

 
15,155

Total Assets
$
590,852

 
$
556,463

 
 
 
 
Assets of Consolidated VIEs Included in Total Assets Above (pledged as collateral)
 

 
 

Trading assets
$
8,947

 
$
8,800

Investment securities
76

 
162

Loans, notes, and mortgages (net)
69

 
94

Other assets
1,352

 
3,022

Total Assets of Consolidated VIEs
$
10,444

 
$
12,078

 
 
 
 
See Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
 
 

4


Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(dollars in millions)
March 31,
2012
 
December 31,
2011
LIABILITIES
 

 
 

Securities financing transactions
 

 
 

Payables under repurchase agreements (includes $54,434 in 2012 and $34,235 in 2011 measured at fair value in accordance with the fair value option election)
$
214,096

 
$
173,767

Payables under securities loaned transactions
15,459

 
11,460

 
229,555

 
185,227

Short-term borrowings (includes $5,732 in 2012 and $5,908 in 2011 measured at fair value in accordance with the fair value option election)
5,918

 
6,051

Deposits
12,538

 
12,364

Trading liabilities, at fair value
 

 
 

Derivative contracts
24,664

 
26,239

Equities and convertible debentures
17,913

 
12,223

Non-U.S. governments and agencies
18,414

 
16,554

Corporate debt and preferred stock
8,659

 
7,084

U.S. Government and agencies
17,874

 
16,976

Municipals, money markets and other
465

 
645

 
87,989

 
79,721

 
 
 
 
Obligation to return securities received as collateral, at fair value
17,615

 
13,716

Payables to Bank of America
13,134

 
31,779

Other payables
 

 
 

Customers
43,362

 
40,153

Brokers and dealers
8,088

 
8,667

Interest and other (includes $123 in 2012 and $173 in 2011 measured at fair value in accordance with the fair value option election)
17,587

 
18,099

 
69,037

 
66,919

Long-term borrowings (includes $32,569 in 2012 and $30,325 in 2011 measured at fair value in accordance with the fair value option election)
102,082

 
107,118

Junior subordinated notes (related to trust preferred securities)
3,606

 
3,600

Total Liabilities
541,474

 
506,495

 
 
 
 
COMMITMENTS AND CONTINGENCIES


 


 
 
 
 
STOCKHOLDER'S EQUITY
 

 
 

 
 
 
 
Common stock (par value $1.331/3 per share; authorized: 3,000,000,000 shares; issued: 2012 and 2011 — 1,000 shares)

 

Paid-in capital
42,953

 
41,967

Accumulated other comprehensive loss (net of tax)
(183
)
 
(235
)
Retained earnings
6,608

 
8,236

Total Stockholder's Equity
49,378

 
49,968

 
 
 
 
Total Liabilities and Stockholder's Equity
$
590,852

 
$
556,463

 
 
 
 
Liabilities of Consolidated VIEs Included in Total Liabilities Above
 

 
 

Short-term borrowings (includes $12 in 2012 and $0 in 2011 of non-recourse debt)
$
4,700

 
$
4,939

Derivative contracts
4

 
4

Other payables
173

 
186

Long-term borrowings (includes $2,751 in 2012 and $2,579 in 2011 of non-recourse debt)
7,028

 
6,595

Total Liabilities of Consolidated VIEs
$
11,905

 
$
11,724

 
 
 
 
See Notes to Condensed Consolidated Financial Statements.

5


Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
 
 
 
 
Three Months Ended
 
Three Months Ended
 
(dollars in millions)
March 31, 2012
 
March 31, 2011
 
Cash flows from operating activities:
 

 
 

 
Net (loss) earnings
$
(1,628
)
 
$
406

 
Adjustments to reconcile net (loss) earnings to cash provided by (used for) operating activities
 

 
 

 
Depreciation and amortization
156

 
194

 
Share-based compensation expense
744

 
956

 
Deferred taxes
(518
)
 
218

 
Earnings from equity method investments
(157
)
 
(138
)
 
Other
37

 
287

 
Changes in operating assets and liabilities:
 

 
 

 
Trading assets
(22,012
)
 
(11,134
)
 
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
(2,696
)
 
1,926

 
Receivables from Bank of America
8,135

 
(8,741
)
 
Receivables under resale agreements
(4,484
)
 
(17,620
)
 
Receivables under securities borrowed transactions
(9,258
)
 
(4,489
)
 
Customer receivables
(2,054
)
 
(4,053
)
 
Brokers and dealers receivables
(1,114
)
 
(886
)
 
Proceeds from loans, notes, and mortgages held for sale
390

 
2,493

 
Other changes in loans, notes, and mortgages held for sale
(42
)
 
(1,420
)
 
Trading liabilities
8,208

 
13,310

 
Payables under repurchase agreements
40,329

 
11,385

 
Payables under securities loaned transactions
3,999

 
3,298

 
Payables to Bank of America
(18,645
)
 
14,344

 
Customer payables
3,209

 
3,323

 
Brokers and dealers payables
(579
)
 
(5,303
)
 
Other, net
2,475

 
(1,036
)
 
Cash provided by (used for) operating activities
4,495

 
(2,680
)
 
Cash flows from investing activities:
 

 
 

 
Proceeds from (payments for):
 

 
 

 
Maturities of available-for-sale securities
183

 
364

 
Sales of available-for-sale securities
3

 
1,587

 
Purchases of available-for-sale securities
(163
)
 
(150
)
 
Equipment and facilities, net
(78
)
 
(48
)
 
Loans, notes, and mortgages held for investment
(19
)
 
618

 
Other investments
417

 
1,145

 
Cash provided by investing activities
343

 
3,516

 
Cash flows from financing activities:
 

 
 

 
Proceeds from (payments for):
 

 
 

 
Short-term borrowings
(133
)
 
431

 
Issuance and resale of long-term borrowings
2,415

 
3,076

 
Settlement and repurchases of long-term borrowings
(10,480
)
 
(7,857
)
 
Deposits
174

 
590

 
Derivative financing transactions
60

 
35

 
Cash used for financing activities
(7,964
)
 
(3,725
)
 
Effect of exchange rate changes on cash and cash equivalents
184

 
68

 
Decrease in cash and cash equivalents
(2,942
)
 
(2,821
)
 
Cash and cash equivalents, beginning of period
13,731

 
17,220

 
Cash and cash equivalents, end of period
$
10,789

 
$
14,399

 
 
 
 
 
 
Non-cash financing activities:
During the three months ended March 31, 2012, Merrill Lynch received a non-cash capital contribution of approximately$1.1 billion from Bank of America associated with certain employee stock awards.


See Notes to Condensed Consolidated Financial Statements.

6


Merrill Lynch & Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2012

Note 1.
Summary of Significant Accounting Policies
Description of Business

Merrill Lynch & Co. Inc. (“ML & Co.”) and together with its subsidiaries (“Merrill Lynch”), provides investment, financing and other related services to individuals and institutions on a global basis through its broker, dealer, banking and other financial services subsidiaries. On January 1, 2009, ML & Co. was acquired by Bank of America Corporation ("Bank of America") in exchange for common and preferred stock with a value of $29.1 billion. ML & Co. is a wholly-owned subsidiary of Bank of America.
Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of Merrill Lynch. The Condensed Consolidated Financial Statements are presented in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). Intercompany transactions and balances within Merrill Lynch have been eliminated. Transactions and balances with Bank of America have not been eliminated. The interim Condensed Consolidated Financial Statements are unaudited; however, all adjustments for a fair presentation of the Condensed Consolidated Financial Statements have been included.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in Merrill Lynch's Annual Report on Form 10-K for the year ended December 31, 2011 (the “2011 Annual Report”). The nature of Merrill Lynch's business is such that the results of any interim period are not necessarily indicative of results for a full year. Certain prior-period amounts have been reclassified to conform to the current period presentation.

Consolidation Accounting

Merrill Lynch determines whether it is required to consolidate an entity by first evaluating whether the entity qualifies as a voting rights entity (“VRE”) or as a variable interest entity (“VIE”).

The Condensed Consolidated Financial Statements include the accounts of Merrill Lynch, whose subsidiaries are generally controlled through a majority voting interest or a controlling financial interest. On January 1, 2010, Merrill Lynch adopted accounting guidance on consolidation of VIEs, which has been deferred for certain investment funds managed on behalf of third parties if Merrill Lynch does not have an obligation to fund losses that could potentially be significant to these funds. Any funds meeting the deferral requirements will continue to be evaluated for consolidation in accordance with the prior guidance.

VREs - VREs are defined to include entities that have both equity at risk that is sufficient to fund future operations and have equity investors that have a controlling financial interest in the entity through their equity investments. In accordance with ASC 810, Consolidation (“Consolidation Accounting”), Merrill Lynch generally consolidates those VREs where it has the majority of the voting rights. For investments in limited partnerships and certain limited liability corporations that Merrill Lynch does not control, Merrill Lynch applies ASC 323, Investments - Equity Method and Joint Ventures (“Equity Method Accounting”), which requires use of the equity method of accounting for investors that have more than a minor influence, which is typically defined as an investment of greater than 3% to 5% of the outstanding equity in the entity. For more traditional corporate structures, in accordance with Equity Method Accounting, Merrill Lynch applies the equity method of accounting where it has the ability to exercise significant influence over the operating and financing decisions of the investee. Significant influence can be evidenced by a significant ownership interest (which is generally defined as a voting interest of 20% to 50%), significant board of director representation, or other contracts and arrangements.


7


VIEs - Those entities that do not meet the VRE criteria are generally analyzed for consolidation as VIEs. A VIE is an entity that lacks equity investors or whose equity investors do not have a controlling financial interest in the entity through their equity investments. Merrill Lynch consolidates those VIEs for which it is the primary beneficiary. In accordance with Consolidation Accounting guidance, Merrill Lynch is considered the primary beneficiary when it has a controlling financial interest in a VIE. Merrill Lynch has a controlling financial interest when it has both the power to direct the activities of the VIE that most significantly impact the VIE's economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Merrill Lynch reassesses whether it is the primary beneficiary of a VIE on a quarterly basis. The quarterly
reassessment process considers whether Merrill Lynch has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether Merrill Lynch has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the VIEs with which Merrill Lynch is involved may change as a result of such reassessments.

Securitization Activities

In the normal course of business, Merrill Lynch has securitized commercial and residential mortgage loans; municipal, government, and corporate bonds; and other types of financial assets. Merrill Lynch may retain interests in the securitized financial assets by holding notes or other debt instruments issued by the securitization vehicle. In accordance with ASC 860, Transfers and Servicing (“Financial Transfers and Servicing Accounting”), Merrill Lynch recognizes transfers of financial assets where it relinquishes control as sales to the extent of cash and any other proceeds received.

Revenue Recognition

Principal transactions revenue includes both realized and unrealized gains and losses on trading assets and trading liabilities, investment securities classified as trading investments and fair value changes associated with certain structured debt. These instruments are recorded at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Gains and losses on sales are recognized on a trade date basis.

Commissions revenues include commissions, mutual fund distribution fees and contingent deferred sales charge revenue, which are all accrued as earned. Commissions revenues also include mutual fund redemption fees, which are recognized at the time of redemption. Commissions revenues earned from certain customer equity transactions are recorded net of related brokerage, clearing and exchange fees.

Managed account and other fee-based revenues primarily consist of asset-priced portfolio service fees earned from the administration of separately managed accounts and other investment accounts for retail investors, annual account fees, and certain other account-related fees.

Investment banking revenues include fees for the underwriting and distribution of debt, equity and loan products and fees for advisory services and tailored risk management solutions, which are accrued when services for the transactions are substantially completed. Underwriting revenues are presented net of transaction-related expenses.

Earnings from equity method investments include Merrill Lynch's pro rata share of income and losses associated with investments accounted for under the equity method of accounting.

Other revenues include gains (losses) on investment securities, including sales of available-for-sale securities, gains (losses) on private equity investments and other principal investments and gains (losses) on loans and other miscellaneous items.

Contractual interest received and paid, and dividends received on trading assets and trading liabilities, excluding derivatives, are recognized on an accrual basis as a component of interest and dividend revenues and interest expense. Interest and dividends on investment securities are recognized on an accrual basis as a component of

8


interest and dividend revenues. Interest related to loans, notes, and mortgages, securities financing activities and certain short- and long-term borrowings are recorded on an accrual basis as interest revenue or interest expense, as applicable.

Use of Estimates

In presenting the Condensed Consolidated Financial Statements, management makes estimates including the following:
Valuations of assets and liabilities requiring fair value estimates;
The allowance for credit losses;
Determination of other-than-temporary impairments for available-for-sale investment securities;
The outcome of litigation;
Determination of the liability for representations and warranties made in connection with the sales of residential mortgage and home equity loans;
Determination of whether VIEs should be consolidated;
The ability to realize deferred tax assets and the recognition and measurement of uncertain tax positions;
The carrying amount of goodwill and intangible assets;
The amortization period of intangible assets with definite lives;
Incentive-based compensation accruals and valuation of share-based payment compensation arrangements; and
Other matters that affect the reported amounts and disclosure of contingencies in the Condensed Consolidated Financial Statements.

Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have a material impact on the Condensed Consolidated Financial Statements, and it is possible that such changes could occur in the near term. A discussion of certain areas in which estimates are a significant component of the amounts reported in the Condensed Consolidated Financial Statements follows:

Fair Value Measurement

Merrill Lynch accounts for a significant portion of its financial instruments at fair value or considers fair value in their measurement. Merrill Lynch accounts for certain financial assets and liabilities at fair value under various accounting literature, including ASC 320, Investments - Debt and Equity Securities (“Investment Accounting”), ASC 815, Derivatives and Hedging (“Derivatives Accounting”), and the fair value option election in accordance with ASC 825-10-25, Financial Instruments - Recognition (the “fair value option election”). Merrill Lynch also accounts for certain assets at fair value under applicable industry guidance, namely ASC 940, Financial Services - Broker and Dealers (“Broker-Dealer Guide”) and ASC 946, Financial Services - Investment Companies (“Investment Company Guide”).

ASC 820, Fair Value Measurements and Disclosures (“Fair Value Accounting”) defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.

Fair values for over-the-counter (“OTC”) derivative financial instruments, principally forwards, options, and swaps, represent the present value of amounts estimated to be received from or paid to a marketplace participant in settlement of these instruments (i.e., the amount Merrill Lynch would expect to receive in a derivative asset assignment or would expect to pay to have a derivative liability assumed). These derivatives are valued using pricing models based on the net present value of estimated future cash flows and directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services, while taking into account the counterparty's creditworthiness, or Merrill Lynch's own creditworthiness, as appropriate. When external pricing services are used, the methods and assumptions used are reviewed by Merrill Lynch. Determining the fair value for

9


OTC derivative contracts can require a significant level of estimation and management judgment.

New and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation often incorporate significant estimates and assumptions that market participants would use in pricing the instrument, which may impact the results of operations reported in the Condensed Consolidated Financial Statements. For instance, on long-dated and illiquid contracts extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. This enables Merrill Lynch to mark to fair value all positions consistently when only a subset of prices are directly observable. Values for OTC derivatives are verified using observed information about the costs of hedging the risk and other trades in the market. As the markets for these products develop, Merrill Lynch continually refines its pricing models to correlate more closely to the market price of these instruments. The recognition of significant inception gains and losses that incorporate unobservable inputs is reviewed by management to ensure such gains and losses are derived from observable inputs and/or incorporate reasonable assumptions about the unobservable component, such as implied bid-offer adjustments.

Certain financial instruments recorded at fair value are initially measured using mid-market prices which results in gross long and short positions valued at the same pricing level prior to the application of position netting. The resulting net positions are then adjusted to fair value representing the exit price as defined in Fair Value Accounting. The significant adjustments include liquidity and counterparty credit risk.

Liquidity

Merrill Lynch makes adjustments to bring a position from a mid-market to a bid or offer price, depending upon the net open position. Merrill Lynch values net long positions at bid prices and net short positions at offer prices. These adjustments are based upon either observable or implied bid-offer prices.

Counterparty Credit Risk

In determining fair value, Merrill Lynch considers both the credit risk of its counterparties, as well as its own creditworthiness. Merrill Lynch attempts to mitigate credit risk to third parties by entering into netting and collateral arrangements. Net counterparty exposure (counterparty positions netted by offsetting transactions and both cash and securities collateral) is then valued for counterparty creditworthiness and the resultant credit valuation adjustment ("CVA") is incorporated into the fair value of the respective instruments. Merrill Lynch generally calculates the CVA for derivatives based on observable market credit spreads.

Fair Value Accounting also requires that Merrill Lynch consider its own creditworthiness when determining the fair value of certain instruments, including OTC derivative instruments and certain structured notes carried at fair value under the fair value option election (i.e., debit valuation adjustment or "DVA"). Merrill Lynch's DVA is measured in the same manner as third party counterparty credit risk. The impact of Merrill Lynch's DVA is incorporated into the fair value of instruments such as OTC derivative contracts even when credit risk is not readily observable in the instrument. OTC derivative liabilities are valued based on the net counterparty exposure as described above.

Legal and Representation and Warranty Reserves

Merrill Lynch is a party in various actions, some of which involve claims for substantial amounts. Amounts are accrued for the financial resolution of claims that have either been asserted or are deemed probable of assertion if, in the opinion of management, it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many cases, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case no accrual is made until that time. Accruals are subject to significant estimation by management, with input from any outside counsel handling the matter.

In addition, Merrill Lynch and certain of its subsidiaries made various representations and warranties in connection with the sale of residential mortgage and home equity loans. Breaches of these representations and warranties may

10


result in the requirement to repurchase mortgage loans or to otherwise make whole or provide other remedies. Refer to Note 14 for further information.

Income Taxes

Merrill Lynch provides for income taxes on all transactions that have been recognized in the Condensed Consolidated Financial Statements in accordance with ASC 740, Income Taxes (“Income Tax Accounting”). Accordingly, deferred taxes are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on deferred tax liabilities and deferred tax assets, as well as other changes in income tax laws, are recognized in net earnings in the period during which such changes are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more-likely-than-not to be realized. Pursuant to Income Tax Accounting, Merrill Lynch may consider various sources of evidence in assessing the necessity of valuation allowances to reduce deferred tax assets to amounts more-likely-than-not to be realized, including the following: 1) past and projected earnings, including losses, of Merrill Lynch and Bank of America, as certain tax attributes such as U.S. net operating losses (“NOLs”), U.S. capital loss carryforwards and foreign tax credit carryforwards can be utilized by Bank of America in certain income tax returns, 2) tax carryforward periods, and 3) tax planning strategies and other factors of the legal entities, such as the intercompany tax-allocation policy. Included within Merrill Lynch's net deferred tax assets are carryforward amounts generated in the U.S. and the U.K. that are deductible in the future as NOLs. Merrill Lynch has concluded that these deferred tax assets are more-likely-than-not to be fully utilized prior to expiration, based on the projected level of future taxable income of Merrill Lynch and Bank of America, which is relevant due to the intercompany tax-allocation policy. For this purpose, future taxable income was projected based on forecasts, historical earnings after adjusting for the past market disruptions and the anticipated impact of the differences between pre-tax earnings and taxable income.

Merrill Lynch recognizes and measures its unrecognized tax benefits in accordance with Income Tax Accounting. Merrill Lynch estimates the likelihood, based on their technical merits, that tax positions will be sustained upon examination considering the facts and circumstances and information available at the end of each period. Merrill Lynch adjusts the level of unrecognized tax benefits when there is more information available, or when an event occurs requiring a change. In accordance with Bank of America's policy, any new or subsequent change in an unrecognized tax benefit related to a Bank of America state consolidated, combined or unitary return in which Merrill Lynch is a member will generally not be reflected in Merrill Lynch's balance sheet. However, upon Bank of America's resolution of the item, any material impact determined to be attributable to Merrill Lynch will be reflected in Merrill Lynch's balance sheet. Merrill Lynch accrues income-tax-related interest and penalties, if applicable, within income tax expense.

Merrill Lynch's results of operations are included in the U.S. federal income tax return and certain state income tax returns of Bank of America. The method of allocating income tax expense is determined under the intercompany tax allocation policy of Bank of America. This policy specifies that income tax expense will be computed for all Bank of America subsidiaries generally on a separate pro forma return basis, taking into account the tax position of the consolidated group and the pro forma Merrill Lynch group. Under this policy, tax benefits associated with NOLs (or other tax attributes) of Merrill Lynch are payable to Merrill Lynch generally upon utilization in Bank of America's tax returns.

Securities Financing Transactions

Merrill Lynch enters into repurchase and resale agreements and securities borrowed and loaned transactions to accommodate customers and earn interest rate spreads (also referred to as “matched-book transactions”), obtain securities for settlement and finance inventory positions. Resale and repurchase agreements are generally accounted for as collateralized financing transactions and may be recorded at their contractual amounts plus accrued interest or at fair value under the fair value option election. In resale and repurchase agreements, typically the termination date of the agreements is before the maturity date of the underlying security. However, in certain situations, Merrill Lynch may enter into agreements where the termination date of the transaction is the same as the maturity date of the underlying security. These transactions are referred to as repo-to-maturity ("RTM") transactions. In accordance

11


with applicable accounting guidance, Merrill Lynch accounts for RTM transactions as sales and purchases when the transferred securities are highly liquid. In instances where securities are considered sold or purchased, Merrill Lynch removes or recognizes the securities from the Condensed Consolidated Balance Sheet and, in the case of sales, recognizes a gain or loss in the Condensed Consolidated Statement of (Loss) Earnings. At March 31, 2012 and December 31, 2011, Merrill Lynch had no outstanding RTM transactions that had been accounted for as sales and an immaterial amount of transactions that had been accounted for as purchases.

Resale and repurchase agreements recorded at fair value are generally valued based on pricing models that use inputs with observable levels of price transparency. Where the fair value option election has been made, changes in the fair value of resale and repurchase agreements are reflected in principal transactions revenues and the contractual interest coupon is recorded as interest revenue or interest expense, respectively. For further information refer to Note 4.

Resale and repurchase agreements recorded at their contractual amounts plus accrued interest approximate fair value, as the fair value of these items is not materially sensitive to shifts in market interest rates because of the short-term nature of these instruments and/or variable interest rates or to credit risk because the resale and repurchase agreements are substantially collateralized.

Merrill Lynch may use securities received as collateral for resale agreements to satisfy regulatory requirements such as Rule 15c3-3 of the Securities Exchange Act of 1934.

Securities borrowed and loaned transactions may be recorded at the amount of cash collateral advanced or received plus accrued interest or at fair value under the fair value option election. Securities borrowed transactions require Merrill Lynch to provide the counterparty with collateral in the form of cash, letters of credit, or other securities. Merrill Lynch receives collateral in the form of cash or other securities for securities loaned transactions. For these transactions, the fees received or paid by Merrill Lynch are recorded as interest revenue or expense. The carrying value of securities borrowed and loaned transactions recorded at the amount of cash collateral advanced or received approximates fair value as these items are not materially sensitive to shifts in market interest rates because of their short-term nature and/or variable interest rates or to credit risk because securities borrowed and loaned transactions are substantially collateralized.

For securities financing transactions, Merrill Lynch's policy is to obtain possession of collateral with a market value equal to or in excess of the principal amount loaned under the agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is generally valued daily and Merrill Lynch may require counterparties to deposit additional collateral or may return collateral pledged when appropriate. Securities financing agreements give rise to negligible credit risk as a result of these collateral provisions, and no allowance for loan losses is considered necessary. These instruments therefore are managed based on market risk rather than credit risk.

Substantially all securities financing activities are transacted under master agreements that give Merrill Lynch the right, in the event of default, to liquidate collateral held and to offset receivables and payables with the same counterparty. Merrill Lynch offsets certain repurchase and resale transactions with the same counterparty on the Condensed Consolidated Balance Sheets where it has such a master agreement, that agreement is legally enforceable and the transactions have the same maturity date.

All Merrill Lynch-owned securities pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the securities are disclosed parenthetically in trading assets or in investment securities on the Condensed Consolidated Balance Sheets.

In transactions where Merrill Lynch acts as the lender in a securities lending agreement and receives securities that can be pledged or sold as collateral, it recognizes an asset on the Condensed Consolidated Balance Sheets carried at fair value, representing the securities received (securities received as collateral), and a liability for the same amount, representing the obligation to return those securities (obligation to return securities received as collateral). The

12


amounts on the Condensed Consolidated Balance Sheets result from such non-cash transactions.

Trading Assets and Liabilities

Merrill Lynch's trading activities consist primarily of securities brokerage and trading; derivatives dealing and brokerage; commodities trading and futures brokerage; and securities financing transactions. Trading assets and trading liabilities consist of cash instruments (e.g., securities and loans) and derivative instruments. Trading assets also include commodities inventory. See Note 6 for additional information on derivative instruments.

Trading assets and liabilities are generally recorded on a trade date basis at fair value. Included in trading liabilities are securities that Merrill Lynch has sold but did not own and will therefore be obligated to purchase at a future date (“short sales”). Commodities inventory is recorded at the lower of cost or fair value. Changes in fair value of trading assets and liabilities (i.e., unrealized gains and losses) are recognized as principal transactions revenues in the current period. Realized gains and losses and any related interest amounts are included in principal transactions revenues and interest revenues and expenses, depending on the nature of the instrument.

Derivatives

A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity security prices, currencies, commodity prices or credit spreads. Derivatives include futures, forwards, swaps, option contracts and other financial instruments with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest rate swaps or currency forwards) or to purchase or sell other financial instruments at specified terms on a specified date (e.g., options to buy or sell securities or currencies). Refer to Note 6 for further information.

Investment Securities

Investment securities consist of marketable investment securities and non-qualifying investments. Refer to Note 8.

Marketable Investment Securities

ML & Co. and certain of its non-broker-dealer subsidiaries follow the guidance within Investment Accounting for investments in debt and publicly traded equity securities. Merrill Lynch classifies those debt securities that it does not intend to sell as held-to-maturity securities. Held-to-maturity securities are carried at amortized cost unless a decline in value is deemed other-than-temporary, in which case the carrying value is reduced. For Merrill Lynch, the trading classification under Investment Accounting generally includes those securities that are bought and held principally for the purpose of selling them in the near term, securities that are economically hedged, or securities that may contain a bifurcatable embedded derivative as defined in Derivatives Accounting. Securities classified as trading are marked to fair value through earnings. All other qualifying securities are classified as available-for-sale ("AFS") and are held at fair value with unrealized gains and losses reported in accumulated other comprehensive (loss) income (“OCI”).

Realized gains and losses on investment securities are included in current period earnings. For purposes of computing realized gains and losses, the cost basis of each investment sold is based on the specific identification method.

Merrill Lynch regularly (at least quarterly) evaluates each held-to-maturity and AFS security whose fair value has declined below amortized cost to assess whether the decline in fair value is other-than-temporary. A decline in a debt security's fair value is considered to be other-than-temporary if it is probable that all amounts contractually due will not be collected or Merrill Lynch either plans to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost. For unrealized losses on debt securities that are deemed other-than-temporary, the credit component of an other-than-temporary impairment is recognized in earnings and the non-credit component is recognized in OCI when Merrill Lynch does not intend to sell the security and it is more likely than not that Merrill Lynch will not be required to sell the security prior to recovery.

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Non-Qualifying Investments

Non-qualifying investments are those investments that are not within the scope of Investment Accounting and primarily include private equity investments accounted for at fair value and other equity securities carried at cost or under the equity method of accounting.

Private equity investments that are held for capital appreciation and/or current income are accounted for under the Investment Company Guide and carried at fair value. Additionally, certain private equity investments that are not accounted for under the Investment Company Guide may be carried at fair value under the fair value option election. The fair value of private equity investments reflects expected exit values based upon market prices or other valuation methodologies, including market comparables of similar companies and discounted expected cash flows.

Merrill Lynch has non-controlling investments in the common shares of corporations and in partnerships that do not fall within the scope of Investment Accounting or the Investment Company Guide. Merrill Lynch accounts for these investments using either the cost or the equity method of accounting based on management's ability to influence the investees, or Merrill Lynch may elect the fair value option. See the Consolidation Accounting section of this Note for more information.

For investments accounted for using the equity method, income is recognized based on Merrill Lynch's share of the earnings or losses of the investee. Dividend distributions are generally recorded as reductions in the investment balance. Impairment testing is based on the guidance provided in Equity Method Accounting, and the investment is reduced when an impairment is deemed other-than-temporary.

For investments accounted for at cost, income is recognized when dividends are received, or the investment is sold. Instruments are periodically tested for impairment based on the guidance provided in Investment Accounting, and the cost basis is reduced when an impairment is deemed other-than-temporary.

Loans, Notes and Mortgages, Net

Merrill Lynch's lending and related activities include loan originations, syndications and securitizations. Loan originations include corporate and institutional loans, residential and commercial mortgages, asset-backed loans, and other loans to individuals and businesses. Merrill Lynch also engages in secondary market loan trading (see the Trading Assets and Liabilities section of this Note) and margin lending, which is included in customer receivables. Loans included in loans, notes, and mortgages are classified for accounting purposes as loans held for investment and loans held for sale. Upon completion of the acquisition of Merrill Lynch by Bank of America, certain loans carried by Merrill Lynch were subject to the requirements of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“Acquired Impaired Loan Accounting”).

Loans held for investment are generally carried at amortized cost, less an allowance for loan losses, which represents Merrill Lynch's estimate of probable losses inherent in its lending activities. The fair value option election has been made for certain held-for-investment loans, notes and mortgages. Merrill Lynch performs periodic and systematic detailed reviews of its lending portfolios to identify credit risks and to assess overall collectability. These reviews, which are updated on a quarterly basis, consider a variety of factors including, but not limited to, historical loss experience, estimated defaults, delinquencies, economic conditions, credit scores and the fair value of any underlying collateral. Provisions for loan losses are included in interest and dividend revenue in the Condensed Consolidated Statements of (Loss) Earnings.

Merrill Lynch's estimate of loan losses includes judgment about collectability based on available information at the balance sheet date, and the uncertainties inherent in those underlying assumptions. While management has based its estimates on the best information available, future adjustments to the allowance for loan losses may be necessary as a result of changes in the economic environment or variances between actual results and the original assumptions.

In general, loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to

14


timely collection, including loans that are individually identified as being impaired, are classified as non-performing unless well-secured and in the process of collection. Loans, primarily commercial, whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties are considered troubled debt restructurings ("TDRs") and are classified as non-performing until the loans have performed for an adequate period of time under the restructured agreement. Interest accrued but not collected is reversed when a commercial loan is considered non-performing. Interest collections on commercial loans for which the ultimate collectability of principal is uncertain are applied as principal reductions; otherwise, such collections are credited to income when received. Commercial loans may be restored to performing status when all principal and interest is current and full repayment of the remaining contractual principal and interest is expected, or when the loan otherwise becomes well-secured and is in the process of collection.

Loans held for sale are carried at lower of cost or fair value. The fair value option election has been made for certain held-for-sale loans, notes and mortgages. Estimation is required in determining these fair values. The fair value of loans made in connection with commercial lending activity, consisting mainly of senior debt, is primarily estimated using the market value of publicly issued debt instruments when available or discounted cash flows.

Nonrefundable loan origination fees, loan commitment fees, and “draw down” fees received in conjunction with held for investment loans are generally deferred and recognized over the contractual life of the loan as an adjustment to the yield. If, at the outset, or any time during the term of the loan, it becomes probable that the repayment period will be extended, the amortization is recalculated using the expected remaining life of the loan. When the loan contract does not provide for a specific maturity date, management's best estimate of the repayment period is used. At repayment of the loan, any unrecognized deferred fee is immediately recognized in earnings. If the loan is accounted for as held for sale, the fees received are deferred and recognized as part of the gain or loss on sale in other revenues. If the loan is accounted for under the fair value option election, the fees are included in the determination of the fair value and included in other revenues.

New Accounting Pronouncements

Effective January 1, 2012, Merrill Lynch adopted new accounting guidance, on a prospective basis, that addresses effective control in repurchase agreements and eliminates the requirement for entities to consider whether the transferor/seller has the ability to repurchase the financial assets in a repurchase agreement. The adoption of this guidance did not have a material impact on Merrill Lynch’s consolidated financial position or results of operations.

Effective January 1, 2012, Merrill Lynch adopted amendments to Fair Value Accounting. The amendments clarify the application of the highest and best use, and valuation premise concepts, preclude the application of "blockage factors" in the valuation of all financial instruments and include criteria for applying the fair value measurement principles to portfolios of financial instruments. The amendments also prescribe additional disclosures for Level 3 fair value measurements and financial instruments not carried at fair value. The adoption of this guidance did not have a material impact on Merrill Lynch's consolidated financial position or results of operations.

On January 1, 2012, new accounting guidance on the presentation of comprehensive income in financial statements became effective, which was early adopted by Merrill Lynch in the 2011 Annual Report by reporting the components of comprehensive income in two separate but consecutive statements.


Note 2.  
Transactions with Bank of America
Merrill Lynch has entered into various transactions with Bank of America, including transactions in connection with certain sales and trading and financing activities as well as the allocation of certain shared services. Details on amounts receivable from and payable to Bank of America as of March 31, 2012 and December 31, 2011 are presented below.
Receivables from Bank of America are comprised of:

15


(dollars in millions)
 
March 31, 2012

December 31, 2011
Cash and cash equivalents
$
6,729

 
$
7,491

Cash and securities segregated for regulatory purposes
5,865

 
6,107

Receivables under resale agreements
22,784

 
26,855

Trading assets
1,942

 
700

Net intercompany funding receivable
77

 
3,567

Other receivables
5,440

 
6,252

 
$
42,837

 
$
50,972

Payables to Bank of America are comprised of:
(dollars in millions)
 
March 31, 2012
 
December 31, 2011
Payables under repurchase agreements
$
586

 
$
22,647

Payables under securities loaned transactions
4,046

 
2,519

Short-term borrowings
1,160

 
1,450

Deposits
105

 
75

Trading liabilities
692

 
503

Other payables
3,365

 
1,935

Long-term borrowings(1)
3,180

 
2,650

Total
$
13,134

 
$
31,779

 
 
 
 
(1)
Amounts include $2,578 of subordinated borrowings from Bank of America (see Note 12).
Total net revenues and non-interest expenses related to transactions with Bank of America for the three months ended March 31, 2012 were $209 million and $425 million, respectively. Total net revenues and non-interest expenses related to transactions with Bank of America for the three months ended March 31, 2011 were $318 million and $615 million, respectively. Total net revenues related to transactions with Bank of America for the three months ended March 31, 2012 and March 31, 2011 included intercompany service fee revenues of $167 million and $233 million, respectively. Total non-interest expenses related to transactions with Bank of America for the three months ended March 31, 2012 and March 31, 2011 included intercompany service fee expenses of $394 million and $553 million, respectively. Intercompany service fee revenue and service fee expense from Bank of America represents the allocations of certain centralized or shared business activities between Merrill Lynch and Bank of America. Such fees are generally determined in accordance with subsidiary transfer pricing agreements.
Bank of America and Merrill Lynch have entered into certain intercompany lending and borrowing arrangements to facilitate centralized liquidity management. Included in these arrangements is a $50 billion extendible one-year revolving credit facility that allows Bank of America to borrow funds from Merrill Lynch at a spread to the London Interbank Offered Rate ("LIBOR") that is reset periodically and is consistent with other intercompany agreements. The credit facility matures on January 1, 2013 and will automatically be extended by one year to the succeeding January 1st unless Merrill Lynch provides written notice not to extend at least 45 days prior to the maturity date. There were no amounts outstanding at both March 31, 2012 and December 31, 2011 under this credit facility. There is also a short-term revolving credit facility that allows Bank of America to borrow up to an additional $25 billion. Interest on borrowings under the credit facility is based on prevailing short-term market rates. The line of credit matures on February 12, 2013. At March 31, 2012, there were no amounts outstanding under this credit facility. See Note 12 for further information on intercompany financing agreements with Bank of America. In addition, Bank of America has guaranteed the performance of Merrill Lynch on certain derivative transactions (see Note 6). Bank of America has also guaranteed certain debt securities, warrants and/or other certificates and obligations of certain subsidiaries of ML & Co. (see Note 12).

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Note 3.  
Segment and Geographic Information
Segment Information
Pursuant to ASC 280, Segment Reporting, operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in determining how to allocate resources and in assessing performance. The business activities of Merrill Lynch are included within certain of the operating segments of Bank of America. Detailed financial information related to the operations of Merrill Lynch, however, is not provided to Merrill Lynch's chief operating decision maker. As a result, Merrill Lynch does not contain any identifiable operating segments under Segment Reporting, and therefore the financial information of Merrill Lynch is presented as a single segment.
Geographic Information
Merrill Lynch conducts its business activities through offices in the following five regions:
United States;
Europe, Middle East, and Africa (“EMEA”);
Pacific Rim;
Latin America; and
Canada.
The principal methodologies used in preparing the geographic information below are as follows:
Revenues are generally recorded based on the location of the employee generating the revenue; and
Intercompany transfers are based primarily on service agreements.
The information that follows, in management’s judgment, provides a reasonable representation of each region’s contribution to the consolidated net revenues:
(dollars in millions)
 
For the Three Months Ended March 31, 2012
 
For the Three Months Ended March 31, 2011
 
Revenues, net of interest expense
 

 
 

 
Europe, Middle East, and Africa
$
1,417

 
$
1,318

 
Pacific Rim
720

 
771

 
Latin America
262

 
332

 
Canada
106

 
79

 
Total Non-U.S. 
2,505

 
2,500

 
United States(1)(2)
2,224

 
5,360

 
Total revenues, net of interest expense
$
4,729

 
$
7,860

 
 
 
 
 
 
(1)
U.S. results for the three months ended March 31, 2012 and March 31, 2011 included net losses of $2.1 billion and $0.3 billion, respectively, due to the impact of the changes in Merrill Lynch’s credit spreads on the carrying values of certain long-term borrowings, primarily structured notes.
(2)
Corporate net revenues and adjustments are reflected in the U.S. region.



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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.

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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 Processes and Techniques

Merrill Lynch has various processes and controls in place to ensure that its fair value measurements are reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office and periodic re-assessments to ensure that models are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are analyzed on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market observable valuation model inputs to ensure that fair values are reasonably estimated. Merrill Lynch executes due diligence procedures over third party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.

While Merrill Lynch believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

During the first quarter of 2012, there were no changes to Merrill Lynch's valuation techniques that had or are expected to have, a material impact on its condensed consolidated financial position or results of operations.

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. Generally, the fair value of mortgage pass-throughs 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

19


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 based 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. These securities are classified as either Level 1 or Level 2 in the fair value hierarchy, primarily based on the exchange on which they are traded.

20



Convertible debentures Convertible debentures are valued based on observable trades and/or external quotes, depending on availability. When neither observable trades nor external quotes are available, the instruments 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. Convertible debentures are generally classified as Level 2 in the fair value hierarchy.

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

21


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) ("EBITDA") 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 March 31, 2012 and December 31, 2011, respectively.

22



(dollars in millions)
 
Fair Value Measurements on a Recurring Basis
 
as of March 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adj(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Securities segregated for regulatory purposes or deposited with clearing organizations:
 
 
 
 
 
 
 
 
 
Corporate debt
$

 
$
113

 
$

 
$

 
$
113

Non-U.S. governments and agencies
33

 
1,612

 

 

 
1,645

U.S. Government and agencies
3,608

 
501

 

 

 
4,109

Total securities segregated for regulatory purposes or deposited with clearing organizations
3,641

 
2,226

 

 

 
5,867

Receivables under resale agreements

 
90,998

 

 

 
90,998

Receivables under securities borrowed transactions

 
533

 

 

 
533

Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
Equities
21,100

 
8,104

 
178

 

 
29,382

Convertible debentures

 
4,920

 
43

 

 
4,963

Non-U.S. governments and agencies
34,080

 
3,383

 
546

 

 
38,009

Corporate debt

 
14,893

 
3,418

 

 
18,311

Preferred stock

 
131

 
207

 

 
338

Mortgages, mortgage-backed and asset-backed

 
5,394

 
3,768

 

 
9,162

U.S. Government and agencies
27,857

 
23,885

 

 

 
51,742

Municipals and money markets
994

 
10,037

 
2,009

 

 
13,040

Physical commodities and other

 
328

 

 

 
328

Total trading assets, excluding derivative contracts
84,031

 
71,075

 
10,169

 

 
165,275

Derivative contracts(2)
2,326

 
639,871

 
8,220

 
(621,203
)
 
29,214

Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. treasury securities and agency debentures
405

 

 

 

 
405

Securities, mortgage-backed and asset backed
 
 
 
 
 
 
 
 
 
     Non-agency MBS

 
60

 

 

 
60

     Corporate ABS

 
161

 
45

 

 
206

Total investment securities available-for-sale
405

 
221

 
45

 

 
671

Investment securities non-qualifying
1,991

 
1,432

 
421

 

 
3,844

Total investment securities
2,396

 
1,653

 
466

 

 
4,515

Securities received as collateral
16,775

 
840

 

 

 
17,615

Loans, notes and mortgages

 
965

 
1,809

 
 
 
2,774

   Other assets

 

 
1,302

 

 
1,302

Liabilities:
 
 
 
 
 
 
 
 
 
Payables under repurchase agreements

 
54,434

 

 

 
54,434

Short-term borrowings

 
5,732

 

 

 
5,732

Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
Equities
15,829

 
1,930

 

 

 
17,759

Convertible debentures

 
154

 

 

 
154

Non-U.S. governments and agencies
17,339

 
1,075

 

 

 
18,414

Corporate debt

 
8,509

 

 

 
8,509

Preferred stock

 
136

 
14

 

 
150

U.S. Government and agencies
17,137

 
737

 

 

 
17,874

Municipals, money markets and other
399

 
21

 
45

 

 
465


23


Total trading liabilities, excluding derivative contracts
50,704

 
12,562

 
59

 

 
63,325

 Derivative contracts(2)
1,747

 
641,960

 
5,013

 
(624,056
)
 
24,664

Obligation to return securities received as collateral
16,775

 
840

 

 

 
17,615

Other payables — interest and other

 
120

 
3

 

 
123

Long-term borrowings

 
30,826

 
1,743

 

 
32,569

 
 
 
 
 
 
 
 
 
 

During the three months ended March 31, 2012, approximately $1,740 million and $350 million of assets and liabilities, respectively, were transferred from Level 1 to Level 2, and approximately $250 million and $40 million of assets and liabilities, respectively, were transferred from Level 2 to Level 1. Approximately $640 million of the transfer from Level 1 to Level 2 was due to a restriction that became effective for a non-qualifying investment security.  The remaining transfers were the result of additional information associated with certain equities, derivative contracts and investment securities non-qualifying.

(dollars in millions)
 
Fair Value Measurements on a Recurring Basis
 
as of December 31, 2011
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adj
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Securities segregated for regulatory purposes or deposited with clearing organizations:
 
 
 
 
 
 
 
 
 
Corporate debt
$

 
$
295

 
$

 
$

 
$
295

Non-U.S. governments and agencies

 
1,757

 

 

 
1,757

U.S. Government and agencies
1,796

 
740

 

 

 
2,536

Total securities segregated for regulatory purposes or deposited with clearing organizations
1,796

 
2,792

 

 

 
4,588

Receivables under resale agreements

 
85,652

 

 

 
85,652

Receivables under securities borrowed transactions

 
259

 

 

 
259

Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
Equities
14,962

 
5,860

 
179

 

 
21,001

Convertible debentures

 
4,519

 
99

 

 
4,618

Non-U.S. governments and agencies
28,026

 
1,871

 
342

 

 
30,239

Corporate debt

 
13,027

 
3,962

 

 
16,989

Preferred stock

 
89

 
227

 

 
316

Mortgages, mortgage-backed and asset-backed

 
5,055

 
3,199

 

 
8,254

U.S. Government and agencies
22,183

 
20,820

 

 

 
43,003

Municipals and money markets
1,067

 
9,755

 
2,047

 

 
12,869

Physical commodities and other

 
175

 

 

 
175

 Total trading assets, excluding derivative contracts
66,238

 
61,171

 
10,055

 

 
137,464

  Derivative contracts(2)
1,810

 
722,108

 
10,110

 
(699,015
)
 
35,013

Investment securities available-for-sale:
 
 
 
 
 
 
 
 
 
U.S. treasury securities and agency debentures
398

 

 

 

 
398

Securities, mortgage-backed and asset backed
 
 
 
 
 
 
 
 
 
     Non-agency MBS

 
249

 

 

 
249

     Corporate ABS

 

 
47

 

 
47

Total investment securities available-for-sale
398

 
249

 
47

 

 
694

Investment securities non-qualifying
2,624

 
328

 
574

 

 
3,526

Total investment securities
3,022

 
577

 
621

 

 
4,220

Securities received as collateral
13,058

 
658

 

 

 
13,716


24


Loans, notes and mortgages

 
596

 
1,726

 

 
2,322

Other assets

 

 
1,349

 

 
1,349

Liabilities:
 
 
 
 
 
 
 
 
 
Payables under repurchase agreements

 
34,235

 

 

 
34,235

Short-term borrowings

 
5,908

 

 

 
5,908

Trading liabilities, excluding derivative contracts:


 


 


 


 


Equities
10,868

 
1,230

 

 

 
12,098

Convertible debentures

 
125

 

 

 
125

Non-U.S. governments and agencies
15,911

 
643

 

 

 
16,554

Corporate debt

 
6,927

 
52

 

 
6,979

Preferred stock

 
89

 
16

 

 
105

U.S. Government and agencies
15,603

 
1,373

 

 

 
16,976

Municipals, money markets and other
549

 
51

 
45

 

 
645

Total trading liabilities, excluding derivative contracts
42,931

 
10,438

 
113

 

 
53,482

Derivative contracts(2)
1,419

 
724,713

 
5,615

 
(705,508
)
 
26,239

Obligation to return securities received as collateral
13,058

 
658

 

 

 
13,716

Other payables — interest and other

 
163

 
10

 

 
173

Long-term borrowings

 
28,139

 
2,186

 

 
30,325

 
 
 
 
 
 
 
 
 
 
(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 year ended December 31, 2011.
Level 3 derivative contracts (assets) relate to derivative positions on U.S. ABS CDOs and other mortgage products of $2.4 billion, $3.1 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $4.6 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 $1.6 billion, $0.7 billion of other credit derivatives that incorporate unobservable model valuation inputs, and $3.3 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).


25


Level 3 Financial Instruments
The following tables provide a summary of changes in Merrill Lynch’s Level 3 financial assets and liabilities for the three months ended March 31, 2012 and March 31, 2011.

(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Financial Assets and Liabilities
Three Months Ended March 31, 2012
 
 
 
Total Realized and Unrealized
Gains or (Losses) included in Income
 
Total Realized
and Unrealized Gains
or (Losses)
included in Income
 
Unrealized
Gains or (Losses) to
OCI
 
Sales
 
Purchases
 
Issuances
 
Settlements
 
 
 
 
 
 
 
Beginning
Balance
 
Principal
Transactions
 
Other
Revenue
 
Interest
 
 
 
 
 
 
 
Transfers
In
 
Transfers
Out
 
Ending
Balance
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading assets, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equities
$
179

 
$
1

 
$

 
$

 
$
1

 
$

 
(39
)
 
41

 
$

 
(9
)
 
$
7

 
$
(2
)
 
$
178

Convertible debentures
99

 
2

 

 

 
2

 

 
(53
)
 

 

 

 
5

 
(10
)
 
43

Non-U.S. governments and agencies
342

 
24

 

 

 
24

 

 
(81
)
 
273

 

 

 

 
(12
)
 
546

Corporate debt
3,962

 
85

 

 

 
85

 

 
(523
)
 
368

 

 
(154
)
 
56

 
(376
)
 
3,418

Preferred stock
227

 
12

 

 

 
12

 

 
(70
)
 
38

 

 
(1
)
 
1

 

 
207

Mortgages, mortgage-backed and asset-backed
3,199

 
90

 

 

 
90

 

 
(230
)
 
166

 

 
(80
)
 
736

 
(113
)
 
3,768

Municipals and money markets
2,047

 
(6
)
 

 

 
(6
)
 

 
(132
)
 
134

 

 
(11
)
 

 
(23
)
 
2,009

Total trading assets, excluding derivative contracts
10,055

 
208

 

 

 
208

 

 
(1,128
)
 
1,020

 

 
(255
)
 
805

 
(536
)
 
10,169

Derivative contracts, net
4,495

 
(701
)
 

 

 
(701
)
 

 
(258
)
 
353

 

 
(375
)
 
59

 
(366
)
 
3,207

Investment securities available-for-sale :
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate ABS
47

 

 
(2
)
 

 
(2
)
 

 

 

 

 

 

 

 
45

Total investment securities available-for-sale
47

 

 
(2
)
 

 
(2
)
 

 

 

 

 

 

 

 
45

Investment securities non-qualifying
574

 

 
(7
)
 

 
(7
)
 

 
(13
)
 
9

 

 
(142
)
 

 

 
421

Total investment securities
621

 

 
(9
)
 

 
(9
)
 

 
(13
)
 
9

 

 
(142
)
 

 

 
466

Loans, notes and mortgages
1,726

 

 
95

 
7

 
102

 

 

 
4

 

 
(23
)
 

 

 
1,809

Other assets
1,349

 

 
(47
)
 

 
(47
)
 

 

 

 

 

 

 

 
1,302

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading liabilities, excluding derivative contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
52

 

 

 

 

 

 
19

 
(38
)
 

 

 
1

 
(34
)
 

Preferred stock
16

 
(2
)
 

 

 
(2
)
 

 

 
(4
)
 

 

 

 

 
14

Municipals, money markets and other
45

 
1

 

 

 
1

 

 
6

 
(6
)
 
1

 

 

 

 
45

Total trading liabilities, excluding derivative contracts
113

 
(1
)
 

 

 
(1
)
 

 
25

 
(48
)
 
1

 

 
1

 
(34
)
 
59

Other payables - interest and other
10

 

 
3

 

 
3

 

 

 
(1
)
 

 

 

 
(3
)
 
3

Long-term borrowings
2,186

 
(139
)
 
(44
)
 

 
(183
)
 

 
33

 
(68
)
 
28

 
(377
)
 
222

 
(464
)
 
1,743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Transfers out for corporate debt primarily relates to increased market liquidity for certain corporate loans. Transfers in for mortgages, mortgage-backed and asset-backed is primarily the result of additional information related to certain CLOs. Transfers out for mortgages, mortgage-backed and asset-backed relates to increased market activity (i.e., executed trades) for certain loans backed by commercial real estate. Transfers out for derivative contracts, net primarily relates to increased price observability (i.e., market comparables) for certain total return swaps ("TRS") and foreign exchange swaps. 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.

26


(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Financial Assets and Liabilities
Three Months Ended March 31, 2011
 
 
 
Total Realized and Unrealized
Gains or (Losses) included in Income
 
Total Realized
and Unrealized Gains
or (Losses)
included in Income
 
Unrealized
Gains or (Losses) to
OCI
 
Sales
 
Purchases
 
Issuances
 
Settlements