10-K 1 y74695e10vk.htm FORM 10-K 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
     
 
X
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 26, 2008
 
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
incorporation or organization)
  (I.R.S. Employer Identification No.)
     
4 World Financial Center,
New York, New York
    
10080
(Address of principal executive offices)
  (Zip Code)
 
(212) 449-1000
Registrant’s telephone number, including area code:
 
     
Securities registered pursuant to Section 12(b) of the Act:    
Title of Each Class   Name of Each Exchange on Which Registered
 
Trust Preferred Securities of Merrill Lynch Capital Trust I (and the guarantees of the registrant with respect thereto); Trust Preferred Securities of Merrill Lynch Capital Trust II (and the guarantees of the registrant with respect thereto); Trust Preferred Securities of Merrill Lynch Capital Trust III (and the guarantees of the registrant with respect thereto)
  New York Stock Exchange
Convertible Securities Exchangeable into Pharmaceutical HOLDRs due September 7, 2010
  NYSE Alternext US LLC
 
See the full list of securities listed on the NYSE Arca and The NASDAQ Stock Market on the pages directly following this cover.
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
X     YES             NO
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
 
       YES      X     NO
 
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     X
 
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 definition of “large accelerated filer,” “accelerated filer” and “’smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  X Accelerated filer     Non-accelerated filer     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 June 27, 2008, the aggregate market value of the voting stock, comprising the Common Stock and the Exchangeable Shares, held by non-affiliates of the Registrant was approximately $17.4 billion.
 
As of the close of business on February 20, 2009, 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 I(1)(a) and (b) of Form 10-K and is therefore filing this Form with a reduced disclosure format as permitted by Instruction I (2).


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Securities registered pursuant to Section 12(b) of the Act and listed on the NYSE Arca are as follows:
 
Capped Leveraged Index Return Notes® Linked to the S&P 500® Index due February 26, 2010; Accelerated Return Bear Market Notes Linked to the S&P 500® Index due October 30, 2009; Bear Market Strategic Accelerated Redemption Securities Linked to the Dow Jones U.S. Real Estate Index due March 2, 2010; Strategic Accelerated Redemption Securities Linked to the Dow Jones Industrial AverageSM due August 31, 2010; 9.25% Callable Stock Return Income Debt SecuritiesSM due September 1, 2010 (payable on the maturity date with Oracle Corporation common stock); Accelerated Return Bear Market Notes Linked to the Russell 2000® Index due November 25, 2009; Strategic Accelerated Redemption SecuritiesSM Linked to the S&P 500® Index due October 5, 2010; Strategic Accelerated Redemption SecuritiesSM Linked to the iShares® MSCI EAFE® Index due October 5, 2010; 100% Principal Protected Range Notes Linked to the S&P 500® Index due October 6, 2009; Accelerated Return NotesSM Linked to the S&P 500® Index due November 25, 2009; Capped Leverage Index Return Notes® Linked to the S&P 500® Index due April 5, 2010; Strategic Accelerated Redemption SecuritiesSM Linked to the S&P 500® Index due November 2, 2010; Accelerated Return Bear Market Notes Linked to the S&P 500® Index due January 21, 2010; Accelerated Return Notes Linked to the S&P 500® Index due January 21, 2010; Capped Leveraged Index Return Notes® Linked to the S&P 500® Index due April 30, 2010; Bear Market Strategic Accelerated Redemption SecuritiesSM Linked to the SPDR S&P Retail Exchange Traded Fund due May 4, 2010; 100% Principal Protected Bullish Range Notes Linked to the S&P 500® Index due November 9, 2009; Accelerated Return NotesSM Linked to the Consumer Staples Select Sector Index due January 29, 2010; 100% Principal Protected Conditional Participation Notes Linked to the S&P 500® Index due December 2, 2009; Bear Market Strategic Accelerated Redemption SecuritiesSM Linked to the iShares® Dow Jones U.S. Real Estate Index Fund due June 2, 2010; Capped Leveraged Index Return Notes® Linked to the S&P 500® Index due May 28, 2010; Accelerated Return NotesSM Linked to the MSCI EAFE® Index due January 29, 2010; Accelerated Return NotesSM Linked to the S&P 500® Index due January 29, 2010; Strategic Accelerated Redemption SecuritiesSM Linked to the S&P 500® Index due December 1, 2010; Accelerated Return Bear Market Notes Linked to the S&P 500® Index due January 29, 2010; 12% Callable STock Return Income DEbt SecuritiesSM Due September 4, 2009 (payable on the stated maturity date with Apple Inc. common stock); STEP Income SecuritiesSM Due June 25, 2009 linked to the common stock of Apple Inc.; Bear Market Strategic Accelerated Redemption SecuritiesSM Linked to the S&P Small Cap Regional Banks Index Due February 2, 2010; Accelerated Return Bear Market Notes Linked to the Russell 3000® Index due October 2, 2009; Bear Market Strategic Accelerated Redemption SecuritiesSM Linked to the Consumer Discretionary Select Sector Index Due December 28, 2009; 9% Callable STock Return Income DEbt SecuritiesSM due March 5, 2009 (payable on the maturity date with Best Buy Co., Inc. common stock); Capped Leveraged Index Return Notes® Linked to the MSCI Brazil IndexSM due January 20, 2010; Accelerated Return NotesSM Linked to the MSCI Brazil IndexSM Due May 5, 2009; 8% Monthly Income Strategic Return Notes® Linked to the CBOE DJIA BuyWrite Index due November 9, 2010; 8% Monthly Income Strategic Return Notes® Linked to the CBOE S&P 500® BuyWrite Index due June 7, 2010; 10% Callable STock Return Income DEbt SecuritiesSM Due March 6, 2009 (payable on the stated maturity date with The Boeing Company common stock); 8% Monthly Income Strategic Return Notes® Linked to the CBOE S&P 500® BuyWrite Index due January 3, 2011; 11% Callable STock Return Income DEbt SecuritiesSM Due April 28, 2009 (payable on the maturity date with Cisco Systems, Inc. common stock); Strategic Accelerated Redemption SecuritiesSM Linked to the Dow Jones Industrial AverageSM due July 7, 2010; Strategic Accelerated Redemption SecuritiesSM Linked to the Dow Jones Industrial AverageSM Due April 2, 2010; Strategic Accelerated Redemption SecuritiesSM Linked to the Dow Jones EURO STOXX 50SM Index Due November 9, 2009; STEP Income SecuritiesSM Due July 14, 2009 Linked to the common stock of Freeport-McMoRan Copper & Gold Inc.; 9% Callable STock Return Income DEbt SecuritiesSM Due March 1, 2010 (payable on the stated maturity date with Google Inc. common stock); Bear Market Strategic Accelerated Redemption SecuritiesSM Linked to the PHLX Housing SectorSM Index due November 3, 2009; Strategic Return Notes® Linked to the Merrill Lynch Factor ModelSM due November 7, 2012; 11% Callable STock Return Income DEbt SecuritiesSM Due February 8, 2010 (payable on the stated maturity date with The Home Depot, Inc. common stock); Accelerated Return NotesSM Linked to the Health Care Select Sector Index due June 2, 2009; Accelerated Return Bear Market Notes Linked to the Energy Select Sector Index due June 29, 2009; Accelerated Return Bear Market Notes Linked to the Energy Select Sector Index due May 5, 2009; Strategic Return Notes® Linked to the Industrial 15 Index due August 9, 2010; Accelerated Return NotesSM Linked to the MSCI EAFE® Index Due August 27, 2009; Callable Market Index Target-Term Securities® due May 4, 2009 Linked to the S&P 500® Index; Strategic Return Notes® Linked to the Baby Boomer Consumption Index due September 6, 2011; Strategic Return Notes® Linked to the Industrial 15 Index due February 2, 2012; 9% Callable STock Return Income DEbt SecuritiesSM Due December 4, 2009 (payable on the stated maturity date with Exxon Mobil Corporation common stock); Capped Leveraged Index Return Notes® Linked to the MSCI Emerging Markets IndexSM due January 29, 2010; Market Index Target-Term Securities® based upon the Dow Jones Industrial AverageSM due August 7, 2009; S&P 500® Market Index Target-Term Securities® due September 4, 2009; Accelerated Return NotesSM Linked to the MSCI EAFE® Index due October 5, 2009; Dow Jones EURO STOXX 50SM Index Market Index Target-Term Securities® due June 28, 2010; Strategic Return Notes® Linked to the Value 30 Index due July 6, 2011; S&P 500® Market Index Target-Term Securities® due June 29, 2009; Nikkei 225 Market Index Target-Term Securities® due March 30, 2009; Nikkei 225 Market Index Target-Term Securities® due April 5, 2010; Strategic Return Notes® Linked to the Select Ten Index due March 8, 2012; Strategic Return Notes® Linked to the Value 30 Index due August 8, 2011; Accelerated Return NotesSM Linked to the MSCI EAFE® Index Due May 4, 2009; Strategic Return Notes® Linked to the Merrill Lynch Factor ModelSM due December 6, 2012; 12% Callable STock Return Income DEbt SecuritiesSM due March 26, 2010 (payable on the stated maturity date with Monsanto Company common stock); STEP Income SecuritiesSM Due August 17, 2009 linked to the common stock of Monsanto Company; Nikkei 225® Market Index Target-Term Securities® due June 5, 2009; 50/100 Nikkei 225® Index Notes due October 7, 2009; Accelerated Return NotesSM Linked to the S&P 500® Index Due April 6, 2009; Accelerated Return NotesSM Linked to the Nikkei 225® Index Due June 26, 2009; STEP Income SecuritiesSM Due June 4, 2009 Linked to the common stock of Qualcomm Incorporated; Strategic Accelerated Redemption SecuritiesSM Linked to the Russell 2000® Index Due April 2, 2010; Capped Leveraged Index Return Notes® Linked to the Russell 2000® Index due January 20, 2010; Capped Leveraged Index Return Notes® Linked to the Russell 2000® Index Due October 30, 2009; Market Index Target-Term Securities® based upon the Russell 2000® Index due March 30, 2009; Strategic Return Notes® Linked to the Select Ten Index due May 10, 2012; Strategic Return Notes® Linked to the Select Ten Index due November 8, 2011; Accelerated Return NotesSM Linked to the S&P 500® Index due August 27, 2009; Strategic Accelerated Redemption SecuritiesSM Linked to the S&P 500® Index due March 8, 2010; Strategic Accelerated Redemption SecuritiesSM Linked to the S&P 500® Index due November 30, 2009; Strategic Return Notes® Linked to the Industrial 15 Index due August 3, 2009; Strategic Accelerated Redemption SecuritiesSM Linked to the S&P 500® Index Due May 4, 2010; 9% Callable STock Return Income DEbt SecuritiesSM Due September 24, 2009 (payable on the stated maturity date with Caterpillar Inc. common stock); Strategic Accelerated Redemption SecuritiesSM Linked to the S&P 500® Index Due August 3, 2010; Strategic Accelerated Redemption SecuritiesSM Linked to


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the S&P 500® Index Due June 25, 2010; Strategic Return Notes® Linked to the Select 10 Index due July 5, 2012; Strategic Return Notes® Linked to the Select Utility Index due February 25, 2009; Strategic Return Notes® Linked to the Select Utility Index due September 28, 2009; Accelerated Return NotesSM Linked to the PHLX Gold and Silver SectorSM Index Due June 2, 2009
 
Securities registered pursuant to Section 12(b) of the Act and listed on The NASDAQ Stock Market are as follows:
 
Strategic Return Notes® Linked to the Industrial 15 Index due April 25, 2011; S&P 500® Market Indexed Target-Term Securities® due June 7, 2010; Leveraged Index Return Notes® Linked to the Nikkei 225® Index due March 2, 2009; S&P 500® MITTS® Securities due August 31, 2011; Strategic Return Notes® Linked to the Select Ten Index due June 4, 2009; 97% Protected Notes Linked to Global Equity Basket due February 14, 2012; Strategic Return Notes® Linked to the Industrial 15 Index due March 30, 2009; Strategic Return Notes® Linked to the Select Ten Index due March 2, 2009; 97% Protected Notes Linked to the performance of the Dow Jones Industrial AverageSM due March 28, 2011; Dow Jones Industrial AverageSM MITTS® Securities due December 27, 2010; Nikkei 225® MITTS® Securities due March 8, 2011; Nikkei 225® MITTS® Securities due September 30, 2010; S&P 500® MITTS® Securities due August 5, 2010; S&P 500® MITTS® Securities due June 3, 2010; Leveraged Index Return Notes® Linked to Dow Jones Industrial AverageSM due September 28, 2009
 
S&P 100 and S&P 500 are registered trademarks of McGraw-Hill, Inc.; EAFE is a registered service mark of Morgan Stanley Capital International Inc.; DOW JONES INDUSTRIAL AVERAGE is a service mark of Dow Jones & Company, Inc.; RUSSELL 1000, RUSSELL 2000 AND RUSSELL 3000 are registered service marks of FRANK RUSSELL COMPANY; PHLX Gold and Silver Sector, PHLX Housing Sector and PHLX Semiconductor Sector are registered service marks of the Philadelphia Stock Exchange, Inc.; STOXX and EURO STOXX 50 are registered service marks of Stoxx Limited; NIKKEI is a registered trademark of KABUSHIKI KAISHA NIHON KEIZAI SHIMBUN SHA. All other trademarks and service marks are the property of Merrill Lynch & Co., Inc.


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ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 26, 2008
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 EX-12: STATEMENT RE: COMPUTATION OF RATIOS
 EX-23: CONSENT OF DELOITTE & TOUCHE LLP
 EX-24.1: POWER OF ATTORNEY
 EX-24.2: ASSISTANT SECRETARY'S CERTIFICATE
 EX-31.1: CERTIFICATION
 EX-31.2: CERTIFICATION
 EX-32.1: CERTIFICATION
 EX-32.2: CERTIFICATION
 EX-99.2: CONDENSED FINANCIAL INFORMATION


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PART I
 
Item 1.  Business
 
Merrill Lynch was formed in 1914 and became a publicly traded company on June 23, 1971. In 1973, we created the holding company, ML & Co., a Delaware corporation that, through its subsidiaries, is one of the world’s leading capital markets, advisory and wealth management companies with offices in 40 countries and territories. In our Global Wealth Management (“GWM”) business, we had total client assets in GWM accounts of approximately $1.2 trillion at December 26, 2008. As an investment bank, we are a leading global trader and underwriter of securities and derivatives across a broad range of asset classes, and we serve as a strategic advisor to corporations, governments, institutions and individuals worldwide. In addition, as of December 26, 2008, we owned approximately half of the economic interest of BlackRock, Inc. (“BlackRock”), one of the world’s largest publicly traded investment management companies with approximately $1.3 trillion in assets under management at the end of 2008.
 
On September 15, 2008, we entered into an Agreement and Plan of Merger, as amended by Amendment No. 1 dated as of October 21, 2008 (the “Merger Agreement”) with Bank of America Corporation (“Bank of America”). Pursuant to the Merger Agreement, on January 1, 2009, a wholly-owned subsidiary of Bank of America (“Merger Sub”) merged with and into ML & Co., with ML & Co. continuing as the surviving corporation and a subsidiary of Bank of America (the “Merger”).
 
Our activities are conducted through two business segments: Global Markets and Investment Banking (“GMI”) and GWM. In addition, we provide a variety of research services on a global basis.
 
Global Markets and Investment Banking
 
The Global Markets division consists of the Fixed Income, Currencies and Commodities (“FICC”) and Equity Markets sales and trading activities for investor clients and on a proprietary basis, while the Investment Banking division provides a wide range of origination and strategic advisory services for issuer clients. Global Markets makes a market in securities, derivatives, currencies, and other financial instruments to satisfy client demands. In addition, Global Markets engages in certain proprietary trading activities. Global Markets is a leader in the global distribution of fixed income, currency and energy commodity products and derivatives. Global Markets also has one of the largest equity trading operations in the world and is a leader in the origination and distribution of equity and equity-related products. Further, Global Markets provides clients with financing, securities clearing, settlement, and custody services and also engages in principal investing in a variety of asset classes and private equity investing. The Investment Banking division raises capital for its clients through underwritings and private placements of equity, debt and related securities, and loan syndications. Investment Banking also offers advisory services to clients on strategic issues, valuation, mergers, acquisitions and restructurings.
 
Global Wealth Management
 
GWM, our full-service retail wealth management segment, provides brokerage, investment advisory and financial planning services, offering a broad range of both proprietary and third-party wealth management products and services globally to individuals, small- to mid-size businesses, and employee benefit plans. GWM is comprised of Global Private Client (“GPC”) and Global Investment Management (“GIM”).
 
GPC provides a full range of wealth management products and services to assist clients in managing all aspects of their financial profile through the Total MerrillSM platform. Total MerrillSM is the platform for GPC’s core strategy offering investment choices, brokerage, advice, planning and/or performance analysis to its clients. GPC’s offerings include commission and fee-based investment accounts; banking, cash management, and credit services, including consumer and small business lending and Visa® cards; trust and generational planning; retirement services; and insurance products.


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GPC services individuals and small- and middle-market corporations and institutions through approximately 16,090 financial advisors as of December 26, 2008.
 
GIM includes our interests in creating and managing wealth management products, including alternative investment products for clients. GIM also includes our share of net earnings from our ownership positions in other investment management companies, including BlackRock.
 
Global Research
 
We also provide a variety of research services on a global basis. These services are at the core of the value proposition we offer to institutional and individual investor clients and are an integral component of the product offerings to GMI and GWM. This group distributes research focusing on three main disciplines globally: fundamental equity research, credit research and macro research. We rank among the leading research providers in the industry, and our analysts cover approximately 3,000 companies in equity research and 800 global bond issuers.
 
Regulation
 
Certain aspects of our business, and the business of our competitors and the financial services industry in general, are subject to stringent regulation by U.S. federal and state regulatory agencies and securities exchanges and by various non-U.S. government agencies or regulatory bodies, securities exchanges, self-regulatory organizations, and central banks, each of which has been charged with the protection of the financial markets and the interests of those participating in those markets.
 
United States Regulatory Oversight and Supervision
 
Holding Company Supervision
 
Prior to our acquisition by Bank of America, we were a consolidated supervised entity subject to group-wide supervision by the SEC and capital requirements generally consistent with the standards of the Basel Committee on Banking Supervision. As such, we computed allowable capital and risk allowances consistent with Basel II capital standards; permitted the SEC to examine the books and records of ML & Co. and any affiliate that did not have a principal regulator; and had various additional SEC reporting, record-keeping, and notification requirements.
 
As a wholly-owned subsidiary of Bank of America, a bank holding company that is also a financial holding company, we are subject to the oversight of, and inspection by, the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”).
 
Broker-Dealer Regulation
 
Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), Merrill Lynch Professional Clearing Corp. (“ML Pro”) and certain other subsidiaries of ML & Co. are registered as broker-dealers with the SEC and, as such, are subject to regulation by the SEC and by self-regulatory organizations, such as the Financial Industry Regulatory Authority (“FINRA”). Certain Merrill Lynch subsidiaries and affiliates, including MLPF&S, are registered as investment advisers with the SEC.
 
The Merrill Lynch entities that are broker-dealers registered with the SEC are subject to Rule 15c3-1 under the Securities Exchange Act of 1934 (“Exchange Act”) which is designed to measure the general financial condition and liquidity of a broker-dealer. Under this rule, these entities are required to maintain the minimum net capital deemed necessary to meet broker-dealers’ continuing commitments to customers and others. Under certain circumstances, this rule limits the ability of such broker-dealers to allow withdrawal of such capital by ML & Co. or other Merrill Lynch subsidiaries. Additional information regarding certain net capital requirements is set forth in Note 15 to the Consolidated Financial Statements.


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Non-U.S. Regulatory Oversight and Supervision
 
Merrill Lynch’s business is also subject to extensive regulation by various non-U.S. regulators including governments, securities exchanges, central banks and regulatory bodies. Certain Merrill Lynch subsidiaries are regulated as broker-dealers under the laws of the jurisdictions in which they operate. Subsidiaries engaged in banking and trust activities outside the United States are regulated by various government entities in the particular jurisdiction where they are chartered, incorporated and/or conduct their business activities. In some cases, the legislative and regulatory developments outside the U.S. applicable to these subsidiaries may have a global impact.
 
Item 1A.  Risk Factors
 
In the course of conducting our business operations, we are exposed to a variety of risks that are inherent to the financial services industry. The following discusses some of the key inherent risk factors that could affect our business and operations, as well as other risk factors which are particularly relevant to us in the current period of significant economic and market disruption. Other factors besides those discussed below or elsewhere in this report also could adversely affect our business and operations, and these risk factors should not be considered a complete list of potential risks that may affect us.
 
Business and economic conditions.  Our businesses and earnings are affected by general business and economic conditions in the United States and abroad. General business and economic conditions that could affect us include the level and volatility of short-term and long-term interest rates, inflation, home prices, employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, investor confidence, and the strength of the U.S. economy and the local economies in which we operate.
 
Economic conditions in the United States and abroad deteriorated significantly during the second half of 2008, and the United States, Europe and Japan currently are in a recession. Dramatic declines in the housing market, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government sponsored entities as well as major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivatives and cash securities, in turn, have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions, reflecting concern about the stability of the financial markets generally and the strength of counterparties. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, a significant reduction in consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition, results of operations, liquidity and access to capital and credit. We do not expect that the difficult conditions in the United States and international financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.
 
Instability of the U.S. financial system.  Beginning in the fourth quarter of 2008, the U.S. government has responded to the ongoing financial crisis and economic slowdown by enacting new legislation and expanding or establishing a number of programs and initiatives. Each of the U.S. Treasury, the FDIC and the Federal Reserve Board have developed programs and facilities, including, among others, the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program and other efforts designed to increase inter-bank lending, improve funding for consumer receivables and restore consumer and counterparty confidence in the banking sector. In addition, Congress recently passed the


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American Recovery and Reinvestment Act of 2009 (the “ARRA”), legislation intended to expand and establish government spending programs and provide tax cuts to stimulate the economy. Congress and the U.S. government continue to evaluate and develop various programs and initiatives designed to stabilize the financial and housing markets and stimulate the economy, including the U.S. Treasury’s recently announced Financial Stability Plan and the U.S. government’s recently announced foreclosure prevention program. The final form of any such programs or initiatives or related legislation cannot be known at this time. There can be no assurance as to the impact that ARRA, the Financial Stability Plan or any other such initiatives or governmental programs will have on the financial markets, including the extreme levels of volatility and limited credit availability currently being experienced. The failure of these efforts to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit, or the trading price of our debt securities (including trust preferred securities).
 
International risk.  We do business throughout the world, including in developing regions of the world commonly known as emerging markets, and as a result, are exposed to a number of risks, including economic, market, reputational, litigation and regulatory risks, in non-U.S. markets. Our businesses and revenues derived from non-U.S. operations are subject to risk of loss from currency fluctuations, social or political instability, changes in governmental policies or policies of central banks, expropriation, nationalization, confiscation of assets, unfavorable political and diplomatic developments and changes in legislation relating to non-U.S. ownership. We also invest or trade in the securities of corporations located in non-U.S. jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities also may be subject to negative fluctuations as a result of the above factors. The impact of these fluctuations could be magnified, because generally non-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid and more volatile than U.S. trading markets.
 
Soundness of other financial institutions.  Our ability to engage in routine trading and funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, funding, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about the financial condition of, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client, and our results of operations in 2007 and 2008 have been materially affected by the credit valuation adjustments described in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — U.S. ABS CDO and Other Mortgage-Related Activities — Monoline Financial Guarantors.” In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to us. There is no assurance that any such losses would not materially and adversely affect our future results of operations.
 
We are party to a large number of derivative transactions, including credit derivatives. Many of these derivative instruments are individually negotiated and non-standardized, which can make exiting, transferring or settling the position difficult. Many credit derivatives require that we deliver to the counterparty the underlying security, loan or other obligation in order to receive payment. In a number of cases, we do not hold, and may not be able to obtain, the underlying security, loan or other obligation. This could cause us to forfeit the payments due to us under these contracts or result in settlement delays with the attendant credit and operational risk as well as increased costs to us.
 
Derivative contracts and other transactions entered into with third parties are not always confirmed by the counterparties on a timely basis. While the transaction remains unconfirmed, we are subject to


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heightened credit and operational risk and in the event of default may find it more difficult to enforce the contract. In addition, as new and more complex derivative products have been created, covering a wider array of underlying credit and other instruments, disputes about the terms of the underlying contracts may arise, which could impair our ability to effectively manage our risk exposures from these products and subject us to increased costs.
 
Access to funds from subsidiaries and parent.  We are a holding company that is a separate and distinct legal entity from its parent, Bank of America, and our broker-dealer, banking and nonbanking subsidiaries. We therefore depend on dividends, distributions and other payments from our broker-dealer, banking and nonbanking subsidiaries and borrowings and will depend in large part on financing from Bank of America to fund payments on our obligations, including debt obligations. Bank of America may in some instances, because of its regulatory requirements as a bank holding company, be unable to provide us with funding we need to fund payments on our obligations. Many of our subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to us. Regulatory action of that kind could impede access to funds we need to make payments on our obligations or dividend payments. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
 
Changes in accounting standards.  Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Some of these policies require use of estimates and assumptions that may affect the value of our assets or liabilities and financial results and are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. As a result of Bank of America’s acquisition of us, we may adopt different estimates and assumptions than those previously used in order to align our estimates, assumptions and policies with those of Bank of America. From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. In addition, accounting standard setters and those who interpret the accounting standards (such as the FASB, the SEC, banking regulators and our outside auditors) may change or even reverse their previous interpretations or positions on how these standards should be applied. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in our restating prior period financial statements. For a further discussion of some of our significant accounting policies and standards and recent accounting changes, see Note 1 to the Consolidated Financial Statements.
 
Competition.  We operate in a highly competitive environment. Over time, there has been substantial consolidation among companies in the financial services industry, and this trend accelerated over the course of 2008 as the credit crisis has led to numerous mergers and asset acquisitions among industry participants and in certain cases reorganization, restructuring or even bankruptcy. This trend also has hastened the globalization of the securities and financial services markets. We will continue to experience intensified competition as continued consolidation in the financial services industry in connection with current market conditions may produce larger and better-capitalized companies that are capable of offering a wider array of financial products and services at more competitive prices. To the extent we expand into new business areas and new geographic regions, we may face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect our ability to compete. Increased competition may affect our results by creating pressure to lower prices on our products and services and reducing market share.
 
Our continued ability to compete effectively in our businesses, including management of our existing businesses as well as expansion into new businesses and geographic areas, depends on our ability to retain and motivate our existing employees and attract new employees. We face significant competition for qualified employees both within the financial services industry, including foreign-based institutions and institutions not subject to compensation restrictions imposed under the TARP Capital Purchase


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Program, the ARRA or any other U.S. government initiatives, and from businesses outside the financial services industry. This is particularly the case in emerging markets, where we are often competing for qualified employees with entities that may have a significantly greater presence or more extensive experience in the region. Over the past year, we have significantly reduced compensation levels. In January 2009, in connection with the U.S. Treasury’s purchase of an additional series of Bank of America’s preferred stock, Bank of America agreed to certain compensation limitations, and ARRA also includes certain additional restrictions, applicable to its senior executive officers and certain other senior managers. A substantial portion of the annual bonus compensation paid to our senior employees has in recent years been paid in the form of equity-based awards, which are now payable in Bank of America common stock. The value of these awards has been impacted by the significant decline in the market price of Bank of America’s common stock. We also have reduced the number of employees across nearly all of our businesses during 2008 and into 2009. In addition, the recent consolidation in the financial services industry has intensified the challenges of cultural integration between differing types of financial services institutions. The combination of these events could have a significant adverse impact on our ability to retain and hire the most qualified employees.
 
Credit concentration risk.  When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contracts. A number of our products expose us to credit risk, including loans, leases and lending commitments, derivatives, including credit default swaps, trading account assets and assets held-for-sale.
 
We estimate and establish reserves or make credit valuation adjustments for credit risks and potential credit losses inherent in our credit exposure (including unfunded credit commitments). This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans or counterparties to perform their obligations. As is the case with any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to accurately estimate the impacts of factors that we identify. Our ability to assess the creditworthiness of our counterparties may be impaired if the models and approaches we use become less predictive of future behaviors, valuations, assumptions or estimates.
 
We have experienced concentration of risk with respect to the mortgage markets, including residential and commercial real estate, each of which represents a significant percentage of our overall credit portfolio. The current financial crisis and economic slowdown has adversely affected this concentration of risk. These exposures will also continue to be impacted by external market factors including default rates, a decline in the value of the underlying property, rating agency actions, the prices at which observable market transactions occur and the financial strength of counterparties, such as financial guarantors, with whom we have economically hedged some of our exposure to these assets.
 
In the ordinary course of our business, we also may be subject to a concentration of credit risk to a particular industry, counterparty, borrower or issuer. A deterioration in the financial condition or prospects of a particular industry or a failure or downgrade of, or default by, any particular entity or group of entities could negatively impact our businesses, perhaps materially, and the systems by which we set limits and monitor the level of our credit exposure to individual entities, industries and countries may not function as we have anticipated. While our activities expose us to many different industries and counterparties, we routinely execute a high volume of transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment funds and insurers, including monolines and other financial guarantors. This has resulted in significant credit concentration with respect to this industry.
 
For a further discussion of credit risk, see “Concentrations of Credit Risk” in Note 3 to the Consolidated Financial Statements.
 
Liquidity risk.  Liquidity is essential to our businesses. Since we were acquired by Bank of America, we established intercompany lending and borrowing arrangements with Bank of America to facilitate


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centralized liquidity management and as a result, our liquidity risk is derived in large part from Bank of America’s liquidity risk. Bank of America’s liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that Bank of America or we may be unable to control, such as a general market disruption, negative views about the financial services industry generally, or an operational problem that affects third parties or us. Bank of America’s ability to raise funding in the debt or equity capital markets has been and could continue to be adversely affected by conditions in the United States and international markets and economy. Global capital and credit markets have been experiencing volatility and disruption since the second half of 2007, and in the second half of 2008, volatility reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for issuers without regard to those issuers’ underlying financial strength. As a result of disruptions in the credit markets, Bank of America and Merrill Lynch have utilized several of the U.S. government’s liquidity programs. Bank of America’s ability and our ability to borrow from other financial institutions or to engage in securitization funding transactions on favorable terms or at all could be adversely affected by further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.
 
Our credit ratings and Bank of America’s credit ratings are important to our liquidity. The ratings of Bank of America’s long-term debt have been downgraded during 2008 by all of the major rating agencies. These rating agencies regularly evaluate Bank of America, us and our securities, and their ratings of our long-term and short-term debt and other securities are based on a number of factors, including Bank of America’s and our financial strength as well as factors not entirely within our control, including conditions affecting the financial services industry generally. In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that we will maintain our current ratings. Our failure to maintain those ratings could adversely affect our liquidity and competitive position, increase borrowing costs or limit access to the capital markets. While the impact on the incremental cost of funds and potential lost funding of an incremental downgrade of our long-term debt by one level might be negligible, a downgrade of Bank of America’s or our short-term credit rating could negatively impact our commercial paper program by materially affecting our incremental cost of funds and potential lost funding. A reduction in our credit ratings also could have a significant impact on certain trading revenues, particularly in those businesses where longer term counterparty performance is critical. In connection with certain trading agreements, we may be required to provide additional collateral in the event of a credit ratings downgrade.
 
For a further discussion of our liquidity position and other liquidity matters and the policies and procedures we use to manage our liquidity risks, see “Liquidity Risk” in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Market risk.  We are directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. For example, changes in interest rates could adversely affect our net interest profit and principal transaction revenues (which we view together as our trading revenues) — which could in turn affect our net earnings. Market risk is inherent in the financial instruments associated with our operations and activities including loans, deposits, securities, derivatives, short-term borrowings and long-term debt. Just a few of the market conditions that may shift from time to time, thereby exposing us to market risk, include fluctuations in interest and currency exchange rates, equity and futures prices, changes in the implied volatility of interest rates, foreign exchange rates, credit spreads and price deterioration or changes in value due to changes in market perception or actual credit quality of either the issuer or its country of origin. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse effects on our results from operations and our overall financial condition.
 
The models that we use to assess and control our risk exposures reflect assumptions about the degrees of correlation or lack thereof among prices of various asset classes or other market indicators. In times of market stress or other unforeseen circumstances, such as the market conditions experienced during


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2008, previously uncorrelated indicators may become correlated, or previously correlated indicators may move in different directions. These types of market movements have at times limited the effectiveness of our hedging strategies and have caused us to incur significant losses, and they may do so in the future. These changes in correlation can be exacerbated where other market participants are using risk or trading models with assumptions or algorithms that are similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to the activity of other market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets. To the extent that we make investments in securities that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions.
 
For a further discussion of market risk and our market risk management policies and procedures, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk.
 
Risks Related to our Commodities Business.  We are exposed to environmental, reputational, regulatory, market and credit risk as a result of our commodities related activities. Through our commodities business, we enter into exchange-traded contracts, financially settled over-the-counter derivatives, contracts for physical delivery and contracts providing for the transportation, transmission and/or storage rights on or in vessels, barges, pipelines, transmission lines or storage facilities. Contracts relating to physical ownership, delivery and/or related activities can expose us to numerous risks, including performance, environmental and reputational risks. For example, we may incur civil or criminal liability under certain environmental laws and our business and reputation may be adversely affected. In addition, regulatory authorities have recently intensified scrutiny of certain energy markets, which has resulted in increased regulatory and legal enforcement, litigation and remedial proceedings involving companies engaged in the activities in which we are engaged.
 
Declining asset values.  We have large proprietary trading and investment positions in a number of our businesses. These positions are accounted for at fair value, and the declines in the values of assets had a direct and large negative impact on our earnings in 2008. We may incur additional losses as a result of increased market volatility or decreased market liquidity, which may adversely impact the valuation of our trading and investment positions. If an asset is marked-to-market, declines in asset values directly and immediately impact our earnings, unless we have effectively “hedged” our exposures to such declines. These exposures may continue to be impacted by declining values of the underlying assets. In addition, the prices at which observable market transactions occur and the continued availability of these transactions, and the financial strength of counterparties, such as financial guarantors, with whom we have economically hedged some of our exposure to these assets, will affect the value of these assets. Sudden declines and significant volatility in the prices of assets may substantially curtail or eliminate the trading activity for these assets, which may make it very difficult to sell, hedge or value such assets. The inability to sell or effectively hedge assets reduces our ability to limit losses in such positions and the difficulty in valuing assets may increase our risk-weighted assets which requires us to maintain additional capital and increases our funding costs.
 
Asset values also directly impact revenues from our wealth management business. We receive certain account fees based on the value of our clients’ portfolios or investment in funds managed by us and, in some cases, we also receive incentive fees based on increases in the value of such investments. Declines in asset values have reduced the value of our clients’ portfolios or fund assets, which in turn has reduced the fees we earn for managing such assets.
 
Merger risks.  There are significant risks and uncertainties associated with mergers. The success of Bank of America’s acquisition of us will depend, in part, on the ability of the combined company to realize the anticipated benefits and cost savings from combining our businesses with Bank of America’s businesses. If the combined company is unable to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected. For example, the combined company may fail to realize the growth opportunities and cost savings anticipated to be derived from the merger. Our businesses currently are experiencing


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unprecedented challenges as a result of the current economic environment and ongoing financial crisis. It is possible that the integration process, including changes or perceived changes in our compensation practices, could result in the loss of key employees, the disruption of our ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients and employees or to achieve the anticipated benefits of the merger. Integration efforts also may divert management attention and resources. These integration matters could have an adverse effect on us for an undetermined period after consummation of the merger.
 
Regulatory considerations and restrictions on dividends.  As a subsidiary of Bank of America, we are, and certain of our bank and non-bank subsidiaries are heavily regulated by bank regulatory agencies at the federal and state levels. This regulatory oversight is established to protect depositors, federal deposit insurance funds and the banking system as a whole, not security holders. Bank of America, we and our broker-dealer and other non-bank subsidiaries are also heavily regulated by securities regulators, domestically and internationally. This regulation is designed to protect investors in securities we sell or underwrite and our clients’ assets. Congress and state legislatures and foreign, federal and state regulatory agencies continually review laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways including limiting the types of financial services and products we may offer and increasing the ability of non-banks to offer competing financial services and products.
 
As a result of the ongoing financial crisis and challenging market conditions, we expect to face increased regulation and regulatory and political scrutiny of the financial services industry, including as a result of Bank of America’s or our participation in the TARP Capital Purchase Program, the ARRA and the U.S. Treasury’s Financial Stability Plan. Compliance with such regulation may significantly increase our costs, impede the efficiency of our internal business processes, and limit our ability to pursue business opportunities in an efficient manner. The increased costs associated with anticipated regulatory and political scrutiny could adversely impact our results of operations.
 
Litigation risks.  Both Bank of America and Merrill Lynch face significant legal risks in our respective businesses, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high and are increasing. Substantial legal liability or significant regulatory action against Bank of America or us could have material adverse financial effects or cause significant reputational harm to us, which in turn could seriously harm our business prospects. For a further discussion of litigation risks, see “Litigation and Regulatory Matters” in Note 11 to the Consolidated Financial Statements.
 
We may explore potential settlements before a case is taken through trial because of uncertainty, risks, and costs inherent in the litigation process. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies (“SFAS No. 5”), we will accrue a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many lawsuits, arbitrations and investigations, including almost all of the class action lawsuits disclosed in “Litigation and Regulatory Matters” in Note 11 to the Consolidated Financial Statements, 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 matter is close to resolution, in which case no accrual is made until that time. In view of the inherent difficulty of predicting the outcome of such matters, particularly in matters in which claimants seek substantial or indeterminate damages, we cannot predict what the eventual loss or range of loss related to such matters will be. Potential losses may be material to our operating results for any particular period and may impact our credit ratings. For a further discussion of litigation risks, see “Litigation and Regulatory Matters” in Note 11 to the Consolidated Financial Statements.
 
Governmental fiscal and monetary policy.  Our businesses and earnings are affected by domestic and international fiscal and monetary policy. For example, the Federal Reserve Board regulates the supply of money and credit in the United States and its policies determine in large part our cost of funds for


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lending, investing and capital raising activities and the return we earn on those loans and investments, both of which affect our net interest profit. The actions of the Federal Reserve Board also can materially affect the value of financial instruments we hold, such as debt securities. Our businesses and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States, non-U.S. governments and international agencies. Changes in domestic and international fiscal and monetary policy are beyond our control and hard to predict.
 
Operational risks.  The potential for operational risk exposure exists throughout our organization. Integral to our performance is the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and the vast array of associates and key executives in our day-to-day and ongoing operations. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes but is not limited to operational or technical failures, unlawful tampering with our technical systems, terrorist activities, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or failure on the part of the key individuals to perform properly.
 
Products and services.  Our business model is based on a diversified mix of businesses that provides a broad range of financial products and services, delivered through multiple distribution channels. Our success depends, in part, on our ability to adapt our products and services to evolving industry standards. There is increasing pressure by competition to provide products and services at lower prices. This can reduce our revenues from our fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require us to incur substantial expenditures to modify or adapt our existing products and services. We might not be successful in developing and introducing new products and services, responding or adapting to changes in consumer spending and saving habits, achieving market acceptance of our products and services, or developing and maintaining loyal customers.
 
Reputational risks.  Our ability to attract and retain clients and employees could be adversely affected to the extent our reputation is damaged. Our actual or perceived failure to address various issues could give rise to reputational risk that could harm us or our business prospects. These issues include, but are not limited to, appropriately addressing potential conflicts of interest; legal and regulatory requirements; ethical issues; money-laundering; privacy; properly maintaining customer and associate personal information; record keeping; sales and trading practices; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products.
 
Risk management processes and strategies.  We seek to monitor and control our risk exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Accordingly, our ability to successfully identify and manage risks facing us is an important factor that can significantly impact our results. For a further discussion of our risk management policies and procedures, see Item 7A — Quantitative and Qualitative Disclosures About Market Risk.
 
Geopolitical risks.  Geopolitical conditions can affect our earnings. Acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, could affect business and economic conditions in the United States and abroad.
 
Additional risks and uncertainties.  We are a diversified financial services company. Although we believe our diversity helps lessen the effect when downturns affect any one segment of our industry, it also means our earnings could be subject to different risks and uncertainties than the ones discussed herein. If any of the risks that we face actually occur, irrespective of whether those risks are described in this section or elsewhere in this report, our business, financial condition and operating results could be materially adversely affected.


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Item 1B.  Unresolved Staff Comments
 
There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.
 
Item 2.  Properties
 
We have offices in various locations throughout the world. Other than those described below as being owned, substantially all of our offices are located in leased premises. We believe that the facilities we own or lease are adequate for the purposes for which they are currently used and that they are well maintained. Set forth below is the location and the approximate square footage of our principal facilities. Each of these principal facilities supports our GMI and GWM businesses. Information regarding our property lease commitments is set forth in “Operating Leases” in Note 11 to the Consolidated Financial Statements.
 
Principal Facilities in the United States
 
Our executive offices and principal administrative offices are located in leased premises at the World Financial Center in New York City. We lease portions of 4 World Financial Center (1,800,000 square feet) and 2 World Financial Center (2,500,000 square feet); both leases expire in 2013. One of our subsidiaries is a partner in the partnership that holds the ground lessee’s interest in 4 World Financial Center. As of December 26, 2008, we occupied the entire 4 World Financial Center and approximately 27% of 2 World Financial Center.
 
We own a 760,000 square foot building at 222 Broadway, New York and occupy 92% of this building. We also lease and occupy, pursuant to an operating lease with an unaffiliated lessor, 1,251,000 square feet of office space and 273,000 square feet of ancillary buildings in Hopewell, New Jersey. One of our subsidiaries is the lessee under such operating lease and owns the underlying land upon which the Hopewell facilities are located. We also own a 54-acre campus in Jacksonville, Florida, with four buildings.
 
Principal Facilities Outside the United States
 
In London, we lease and occupy 100% of our 576,626 square foot London headquarters facility known as Merrill Lynch Financial Centre; this lease expires in 2022. In addition, we lease approximately 305,086 square feet in other London locations with various terms, the longest of which lasts until 2020. We occupy 134,375 square feet of this space and have sublet the remainder. In Tokyo, we have leased 292,349 square feet until 2014 for our Japan headquarters. Other leased facilities in the Pacific Rim are located in Hong Kong, Singapore, Seoul, South Korea, Mumbai and Chunnai, India, and Sydney and Melbourne, Australia.
 
Item 3.  Legal Proceedings
 
Refer to Note 11 to the Consolidated Financial Statements in Part II, Item 8 for a discussion of litigation and regulatory matters.
 
Item 4.  Submission of Matters to a Vote of Security Holders.
 
Not required pursuant to instruction I(2).


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PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
The table below sets forth the information with respect to purchases made by or on behalf of us or any “affiliated purchaser” of our common stock during the year ended December 26, 2008.
 
                                 
(dollars in millions, except per share amounts)
 
            Total Number of
  Approximate
            Shares
  Dollar Value of
            Purchased as
  Shares that May
    Total Number of
  Average
  Part of Publicly
  Yet be Purchased
    Shares
  Price Paid
  Announced
  Under the
Period   Purchased   per Share   Program(1)   Program
 
First Quarter 2008 (Dec. 29, 2007 — Mar. 28, 2008)
                               
Capital Management Program
    -     $ -       -     $ 3,971  
Employee Transactions(2)
    17,078,898       54.59       N/A       N/A  
                                 
Second Quarter 2008 (Mar. 29, 2008 — June 27, 2008)
                               
Capital Management Program
    -     $ -       -     $ 3,971  
Employee Transactions(2)
    2,780,526       43.11       N/A       N/A  
                                 
Third Quarter 2008 (Jun. 28, 2008 — Sept. 26, 2008)
                               
Capital Management Program
    -     $ -       -     $ 3,971  
Employee Transactions(2)
    6,197,808       25.42       N/A       N/A  
                                 
Month #1 (Sept. 27, 2008 — Oct. 31, 2008)
                               
Capital Management Program
    -     $ -       -     $ 3,971  
Employee Transactions(2)
    3,185,077       18.11       N/A       N/A  
                                 
Month #2 (Nov. 1, 2008 — Nov. 28, 2008)
                               
Capital Management Program
    -     $ -       -     $ 3,971  
Employee Transactions(2)
    2,153,426       12.44       N/A       N/A  
                                 
Month #3 (Nov. 29, 2008 — Dec. 26, 2008)
                               
Capital Management Program
    -     $ -       -     $ 3,971  
Employee Transactions(2)
    1,414,962       12.54       N/A       N/A  
                                 
Fourth Quarter 2008 (Sept. 27, 2008 — Dec. 26, 2008)
                               
Capital Management Program
    -     $ -       -     $ 3,971  
Employee Transactions(2)
    6,753,465       15.14       N/A       N/A  
                                 
Full Year 2008 (Dec. 29, 2007 — Dec. 26, 2008)
                               
Capital Management Program
    -     $ -       -     $ 3,971  
Employee Transactions(2)
    32,810,697       39.99       N/A       N/A  
                                 
(1) No repurchases were made for 2008.
(2) Included in the total number of shares purchased are: (i) shares purchased during the period by participants in the Merrill Lynch 401(k) Savings and Investment Plan (“401(k)”) and the Merrill Lynch Retirement Accumulation Plan (“RAP”), (ii) shares delivered or attested to in satisfaction of the exercise price by holders of ML & Co. employee stock options (granted under employee stock compensation plans) and (iii) Restricted Shares withheld (under the terms of grants under employee stock compensation plans) to offset tax withholding obligations that occur upon vesting and release of Restricted Shares. ML & Co.’s employee stock compensation plans provide that the value of the shares delivered, attested, or withheld, shall be the average of the high and low price of ML & Co.’s common stock (Fair Market Value) on the date the relevant transaction occurs.


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Dividends Per Common Share
 
Prior to the acquisition by Bank of America, the principal market on which ML & Co. common stock was traded was the New York Stock Exchange. ML & Co. common stock was also listed on the Chicago Stock Exchange, the London Stock Exchange and the Tokyo Stock Exchange. Following the acquisition by Bank of America, there is no longer an established public trading market for ML & Co. common stock. Information relating to the amount of cash dividends declared for the two most recent fiscal years is set forth below.
 
                                 
 
    First
  Second
  Third
  Fourth
(Declared and Paid)   Quarter   Quarter   Quarter   Quarter
 
 
2008
  $ 0.35     $ 0.35     $ 0.35     $ 0.35  
2007
  $ 0.35     $ 0.35     $ 0.35     $ 0.35  
                                 
 
 
 
As of the date of this report, Bank of America is the sole holder of the outstanding common stock of ML & Co. With the exception of regulatory restrictions on subsidiaries’ abilities to pay dividends, there were no restrictions on ML & Co.’s present ability to pay dividends on common stock, other than ML & Co.’s obligation to make payments on its mandatory convertible preferred stock, junior subordinated debt related to trust preferred securities, and the governing provisions of Delaware General Corporation Law. Certain subsidiaries’ ability to declare dividends may also be limited.
 
Securities Authorized for Issuance under Equity Compensation Plans
 
As a result of the acquisition by Bank of America, there are no equity securities of ML & Co. that are authorized for issuance under any equity compensation plans. Refer to Note 12 and Note 13 of the Consolidated Financial Statements for further information on equity compensation and benefit plans.
 
Item 6.  Selected Financial Data.
 
Not required pursuant to instruction I(2).


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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results Of Operations
 
Forward-Looking Statements and Non-GAAP Financial Measures
 
We have included certain statements in this report which may be considered forward-looking, including those about management expectations and intentions, the impact of off-balance sheet exposures, significant contractual obligations and anticipated results of litigation and regulatory investigations and proceedings. These forward-looking statements represent only Merrill Lynch & Co., Inc.’s (“ML & Co.” and, together with its subsidiaries, “Merrill Lynch”, the “Company”, the “Corporation”, “we”, “our” or “us”) beliefs regarding future performance, which is inherently uncertain. There are a variety of factors, many of which are beyond our control, which affect our operations, performance, business strategy and results and could cause our actual results and experience to differ materially from the expectations and objectives expressed in any forward-looking statements. These factors include, but are not limited to, actions and initiatives taken by both current and potential competitors and counterparties, general economic conditions, market conditions, the effects of current, pending and future legislation, regulation and regulatory actions, the actions of rating agencies and the other risks and uncertainties detailed in this report. See “Risk Factors” in Part I, Item 1A of this Form 10-K. Accordingly, you should not place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. The reader should, however, consult further disclosures we may make in future filings of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
 
From time to time, we may also disclose financial information on a non-GAAP basis where management uses this information and believes this information will be valuable to investors in gauging the quality of our financial performance, identifying trends in our results and providing more meaningful period-to-period comparisons.
 
Introduction
 
Merrill Lynch was formed in 1914 and became a publicly traded company on June 23, 1971. In 1973, we created the holding company, ML & Co., a Delaware corporation that, through its subsidiaries, is one of the world’s leading capital markets, advisory and wealth management companies. In our Global Wealth Management (“GWM”) business, we had total client assets in GWM accounts of approximately $1.2 trillion at December 26, 2008. As an investment bank, we are a leading global trader and underwriter of securities and derivatives across a broad range of asset classes, and we serve as a strategic advisor to corporations, governments, institutions and individuals worldwide. In addition, as of December 26, 2008, we owned approximately half of the economic interest of BlackRock, Inc. (“BlackRock”), one of the world’s largest publicly traded investment management companies with approximately $1.3 trillion in assets under management at the end of 2008.
 
On January 1, 2009, Merrill Lynch was acquired by, and became a wholly-owned subsidiary of, Bank of America Corporation (“Bank of America”). As a result of the acquisition, certain information is not required in this Form 10-K as permitted by general Instruction I of Form 10-K. We have also abbreviated Management’s Discussion and Analysis of Financial Condition and Results of Operations as permitted by general Instruction I.


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Our activities are conducted through two business segments: Global Markets and Investment Banking (“GMI”) and GWM. The following is a description of our business segments:
 
             
      GMI     GWM
Clients
    Corporations, financial institutions, institutional investors, and governments     Individuals, small- to mid-size businesses, and employee benefit plans
             
Products and businesses
   
Global Markets (comprised of Fixed Income, Currencies & Commodities (“FICC”) & Equity Markets)
•   Facilitates client transactions and makes markets in securities, derivatives, currencies, commodities and other financial instruments to satisfy client demands
•   Provides clients with financing, securities clearing, settlement, and custody services
•   Engages in principal and private equity investing, including managing investment funds, and certain proprietary trading activities
    Global Private Client (“GPC”)
•   Delivers products and services primarily through our Financial Advisors (“FAs”)
•   Commission and fee-based investment accounts
•   Banking, cash management, and credit services, including consumer and small business lending and Visa® cards
•   Trust and generational planning
•   Retirement services
•   Insurance products
             
      Investment Banking     Global Investment Management (“GIM”)
     
•   Provides a wide range of securities origination services for issuer clients, including underwriting and placement of public and private equity, debt and related securities, as well as lending and other financing activities for clients globally
•   Advises clients on strategic issues, valuation, mergers, acquisitions and restructurings
    •   Creates and manages hedge funds and other alternative investment products for GPC clients
•   Includes net earnings from our ownership positions in other investment management companies, including our investment in BlackRock
             


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Executive Overview
 
Company Results
 
We reported a net loss from continuing operations for 2008 of $27.6 billion, or $24.82 per diluted share, compared with a net loss from continuing operations of $8.6 billion, or $10.73 per diluted share for 2007. Our net loss for 2008 was $27.6 billion, or $24.87 per diluted share, compared with a net loss of $7.8 billion, or $9.69 per diluted share for 2007. Revenues, net of interest expense (“net revenues”) for 2008 were negative $12.6 billion, compared with positive $11.3 billion in the prior-year, while the pre-tax loss from continuing operations was $41.8 billion for 2008 compared with $12.8 billion for 2007.
 
Net revenues and net earnings during 2008 were impacted by a number of significant items, including the following:
 
  •  Net losses due to credit valuation adjustments (“CVA”) related to certain hedges with financial guarantors of $10.4 billion;
  •  Net write-downs of $10.2 billion (excluding CVA) on U.S. asset-backed collateralized debt obligations (“U.S. ABS CDOs”);
  •  Net write-downs of approximately $10.8 billion related to other-than-temporary impairment charges recognized on our U.S. banks’ investment securities portfolio, losses related to leveraged finance loans and commitments, losses related to certain government sponsored entities (“GSEs”) and major U.S. broker-dealers, the default of a major U.S. broker-dealer and other market dislocations;
  •  Net losses of $6.5 billion resulting primarily from write-downs and losses on asset sales across residential mortgage-related exposures and commercial real estate exposures;
  •  Net losses of $2.1 billion due to write-downs on private equity investments;
  •  Net gains of $5.1 billion due to the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities;
  •  A net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P.;
  •  A $2.6 billion foreign currency gain related to currency hedges of our U.K. deferred tax assets;
  •  A $2.5 billion non tax-deductible payment to affiliates and transferees of Temasek Holdings (Private) Limited (“Temasek”) related to our July 2008 common stock offering;
  •  A $2.3 billion goodwill impairment charge related to our FICC and Investment Banking businesses;
  •  A $0.5 billion expense, including a $125 million fine, arising from Merrill Lynch’s offer to repurchase auction rate securities (“ARS”) from our private clients and the associated settlement with regulators; and
  •  A $0.5 billion restructuring charge associated with headcount reduction initiatives conducted during the year.
 
Our net loss applicable to common shareholders for 2008 included $2.1 billion of additional preferred stock dividends associated with the exchange of the mandatory convertible preferred stock.
 
In 2007, the net loss was primarily driven by write-downs within FICC of approximately $23.2 billion related to U.S. collateralized debt obligations comprised of U.S. ABS CDOs, U.S. sub-prime residential mortgages and securities, and credit valuation adjustments related to hedges with financial guarantors on U.S. ABS CDOs.
 
Strategic and Other Significant Transactions
 
Bank of America
 
On January 1, 2009, we were acquired by Bank of America through the merger of a wholly owned subsidiary of Bank of America with and into ML & Co. with ML & Co. continuing as the surviving corporation and a wholly owned subsidiary of Bank of America. Upon completion of the acquisition,


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each outstanding share of ML & Co. common stock was converted into 0.8595 shares of Bank of America common stock. As of the completion of the acquisition, ML & Co. Series 1 through Series 8 preferred stock were converted into Bank of America preferred stock with substantially identical terms to the corresponding series of Merrill Lynch preferred stock (except for additional voting rights provided to the Bank of America securities). Our 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 2, and 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 3 that was outstanding immediately prior to the completion of the acquisition remained issued and outstanding subsequent to the acquisition, but are now convertible into Bank of America common stock.
 
Capital Transactions
 
On December 24, 2007, Merrill Lynch reached agreements with each of Temasek and Davis Selected Advisors LP (“Davis”) to sell an aggregate of 116.7 million shares of newly issued ML & Co. common stock, par value $1.331/3 per share, at $48.00 per share, for an aggregate purchase price of approximately $5.6 billion.
 
Davis purchased 25 million shares of Merrill Lynch common stock on December 27, 2007 at a price per share of $48.00, or an aggregate purchase price of $1.2 billion. Temasek purchased 55 million shares on December 28, 2007 and the remaining 36.7 million shares on January 11, 2008 for an aggregate purchase price of $4.4 billion. In addition, Merrill Lynch granted Temasek an option to purchase an additional 12.5 million shares of common stock under certain circumstances. This option was exercised, with 2.8 million shares issued on February 1, 2008 and 9.7 million shares issued on February 5, 2008, in each case at a purchase price of $48.00 per share for an aggregate purchase price of $600 million.
 
On various dates in January and February 2008, we issued an aggregate of 66,000 shares of newly issued 9% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 1, par value $1.00 per share and liquidation preference $100,000 per share, to several long-term investors at a price of $100,000 per share, for an aggregate purchase price of approximately $6.6 billion.
 
On April 29, 2008, Merrill Lynch issued $2.7 billion of new perpetual 8.625% Non-Cumulative Preferred Stock, Series 8.
 
On July 28, 2008, we announced a public offering of 437 million shares of common stock (including the exercise of the over-allotment option) at a price of $22.50 per share, for an aggregate amount of $9.8 billion.
 
In satisfaction of our obligations under the reset provisions contained in the investment agreement with Temasek, we paid Temasek $2.5 billion, which is recorded as a non-tax deductible expense in the Consolidated Statement of (Loss)/Earnings for the year-ended December 26, 2008.
 
Concurrent with the $9.8 billion common stock offering, holders of $4.9 billion of the $6.6 billion of our mandatory convertible preferred stock agreed to exchange their preferred stock for approximately 177 million shares of common stock, plus $65 million in cash. Holders of the remaining $1.7 billion of mandatory convertible preferred stock agreed to exchange their preferred stock for new mandatory convertible preferred stock. The price reset feature for all securities exchanged was eliminated. In connection with the elimination of the price reset feature of the $6.6 billion of preferred stock, we recorded additional preferred dividends of $2.1 billion in 2008.
 
CDO Sale and Termination of Monoline Hedges
 
On September 18, 2008, we sold $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds (“Lone Star”) for a sales price of $6.7 billion. In addition to the ABS CDO sale, we terminated certain hedges with monoline financial guarantors related to U.S. super senior ABS CDOs. We recorded net write-downs of $5.7 billion during 2008 as a result of this sale of


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U.S. super senior ABS CDOs and the termination and potential settlement of related hedges with monoline guarantor counterparties.
 
Bloomberg, L.P.
 
On July 17, 2008, we sold our 20% ownership stake in Bloomberg, L.P. to Bloomberg Inc., for $4.4 billion. The sale resulted in a $4.3 billion net pre-tax gain. As consideration for the sale of our interest in Bloomberg L.P., we received notes issued by Bloomberg Inc. (the general partner and owner of substantially all of Bloomberg L.P.) with an aggregate face amount of approximately $4.3 billion and cash in the amount of approximately $110 million. The notes represent senior unsecured obligations of Bloomberg Inc. and are recorded as Investment Securities on our Consolidated Balance Sheet.
 
Auction Rate Securities
 
On August 21, 2008, we reached a global agreement with the New York Attorney General, the Securities and Exchange Commission, the Massachusetts Securities Division and other state securities regulators relating to sales of Auction Rate Securities (“ARS”). Under this agreement, eligible retail clients of Merrill Lynch were given a 12-month or 15-month period, depending on the level of assets held at Merrill Lynch by such client, in which to sell certain eligible ARS to Merrill Lynch at par. Merrill Lynch’s offer to purchase such ARS from those of its eligible clients or purchasers will remain open through January 15, 2010. In connection with this agreement, during 2008 we recorded a charge of $0.5 billion, which includes a fine of $125 million. The charge is recorded within Other expenses in the Consolidated Statement of (Loss)/Earnings.
 
Goodwill Impairment
 
Due to the severe deterioration in the financial markets in the fourth quarter of 2008 and the related impact on the fair value of Merrill Lynch’s reporting units, an impairment analysis was conducted in the fourth quarter of 2008. Based on this analysis, a non-cash impairment charge of $2.3 billion, primarily related to FICC, was recognized as a loss within the GMI business segment.
 
Restructuring Charge
 
During 2008, Merrill Lynch recorded a pre-tax restructuring charge of $486 million, primarily related to severance costs and the accelerated amortization of previously granted stock awards associated with headcount reduction initiatives. Refer to Note 17 to the Consolidated Financial Statements for additional information.
 
Emergency Economic Stabilization Act of 2008
 
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”). Pursuant to the EESA, the United States Department of the Treasury (the “U.S. Treasury”) has the authority to, among other things, invest in financial institutions and purchase mortgages, mortgage-backed securities and certain other financial instruments from financial institutions, in an aggregate of up to $700 billion, for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Treasury announced a plan (the “Capital Purchase Program” or “CPP”) to invest up to $250 billion of this $700 billion in certain eligible U.S. financial institutions in the form of non-voting, preferred stock initially paying quarterly dividends at a 5% annual rate.
 
On October 26, 2008, we entered into a securities purchase agreement with the U.S. Treasury setting forth the terms upon which we would issue a new series of preferred stock and warrants to the U.S. Treasury (the “TARP Purchase Agreement”). However, in view of the Bank of America acquisition, we determined that we would not sell securities to the U.S. Treasury under the CPP.


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Additionally, in October 2008, the Federal Reserve announced the creation of the Commercial Paper Funding Facility to provide a liquidity backstop to U.S. issuers of commercial paper. A special purpose vehicle will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers through October 30, 2009. We were eligible for the Commercial Paper Funding Facility and began utilizing this program in October 2008 as an additional source of funding. Also, on October 14, 2008, the Federal Deposit Insurance Corporation (“FDIC”) announced a new program, the Temporary Liquidity Guarantee Program, under which specific categories of newly issued senior unsecured debt issued by eligible financial institutions on or before June 30, 2009 would be guaranteed until June 30, 2012. This program also provides deposit insurance for funds in non-interest bearing transaction deposit accounts at FDIC-insured institutions. We agreed to participate in this FDIC program and have issued FDIC guaranteed commercial paper.
 
On October 29, 2008, we had entered into a $10 billion committed unsecured bank revolving credit facility with Bank of America, N.A. with borrowings guaranteed under the FDIC’s guarantee program. There were no borrowings under this facility at December 26, 2008. Following the completion of Bank of America’s acquisition of ML & Co., this facility was terminated. For additional information on our other credit facilities, see “Liquidity Risk — Committed Credit Facilities.”
 
Other Events
 
On January 16, 2009, due to larger than expected fourth quarter losses of Merrill Lynch and as part of its commitment to support financial market stability, the U.S. government agreed to assist Bank of America in the Merrill Lynch acquisition by agreeing to provide certain guarantees and capital. With respect to the guarantees, the U.S. government agreed in principle to provide protection against the possibility of unusually large losses on a pool of certain domestic assets. It is anticipated that a portion of the exposures discussed in “Results of Operations”, including leveraged loans and commercial real estate loans, CDOs, certain trading counterparty exposure including monolines, and investment securities, would be part of this agreement.


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Results Of Operations
                         
(dollars in millions , except per share amounts)
            %
            Change
            2008 vs.
    2008   2007   2007
 
Revenues
                       
Principal transactions
  $ (27,225 )   $ (12,067 )     N/M %
Commissions
    6,895       7,284       (5 )
Managed accounts and other fee-based revenues
    5,544       5,465       1  
Investment banking
    3,733       5,582       (33 )
Earnings from equity method investments
    4,491       1,627       176  
Other
    (10,065 )     (2,190 )     N/M  
                         
Subtotal
    (16,627 )     5,701       N/M  
Interest and dividend revenues
    33,383       56,974       (41 )
Less interest expense
    29,349       51,425       (43 )
                         
Net interest profit
    4,034       5,549       (27 )
                         
Revenues, net of interest expense
    (12,593 )     11,250       N/M  
                         
Non-interest expenses:
                       
Compensation and benefits
    14,763       15,903       (7 )
Communications and technology
    2,201       2,057       7  
Brokerage, clearing, and exchange fees
    1,394       1,415       (1 )
Occupancy and related depreciation
    1,267       1,139       11  
Professional fees
    1,058       1,027       3  
Advertising and market development
    652       785       (17 )
Office supplies and postage
    215       233       (8 )
Other
    2,402       1,522       58  
Payment related to price reset on common stock offering
    2,500       -       N/M  
Goodwill impairment charge
    2,300       -       N/M  
Restructuring charge
    486       -       N/M  
                         
Total non-interest expenses
    29,238       24,081       21  
                         
Pre-tax loss from continuing operations
    (41,831 )     (12,831 )     N/M  
Income tax benefit
    (14,280 )     (4,194 )     N/M  
                         
Net loss from continuing operations
    (27,551 )     (8,637 )     N/M  
                         
Discontinued operations:
                       
Pre-tax (loss)/earnings from discontinued operations
    (141 )     1,397       N/M  
Income tax (benefit)/expense
    (80 )     537       N/M  
                         
Net (loss)/earnings from discontinued operations
    (61 )     860       N/M  
                         
Net loss
  $ (27,612 )   $ (7,777 )     N/M  
                         
Preferred stock dividends
    2,869       270       N/M  
                         
Net loss applicable to common stockholders
  $ (30,481 )   $ (8,047 )     N/M  
                         
Basic loss per common share from continuing operations
  $ (24.82 )   $ (10.73 )     N/M  
Basic (loss)/earnings per common share from discontinued operations
    (0.05 )     1.04       N/M  
                         
Basic loss per common share
  $ (24.87 )   $ (9.69 )     N/M  
                         
Diluted loss per common share from continuing operations
  $ (24.82 )   $ (10.73 )     N/M  
Diluted (loss)/earnings per common share from discontinued operations
    (0.05 )     1.04       N/M  
                         
Diluted loss per common share
  $ (24.87 )   $ (9.69 )     N/M  
                         
Book value per share
  $ 7.12     $ 29.34       (76 )
 
 
Note:  Certain prior period amounts have been reclassified to conform to the current period presentation.
N/M = Not Meaningful


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Consolidated Results of Operations
 
Our net loss from continuing operations for 2008 was $27.6 billion compared with a net loss from continuing operations of $8.6 billion in 2007. Net revenues in 2008 were negative $12.6 billion compared with positive $11.3 billion for the prior year. The increase in the net loss and the decrease in net revenues were primarily driven by the significant write-downs recorded during 2008, including: credit valuation adjustments of $10.4 billion primarily related to certain hedges with financial guarantors; net write-downs of $10.2 billion related to U.S. ABS CDOs; net losses of $6.5 billion related to certain residential and commercial mortgage exposures; net losses of $4.1 billion in the investment securities portfolio of Merrill Lynch’s U.S. banks; and $4.2 billion of write-downs on leveraged finance loans and commitments. These net losses were partially offset by a net gain of $5.1 billion from the impact of the widening of credit spreads on the carrying value of certain of our long-term debt liabilities and a net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P.
 
Losses per diluted share from continuing operations were $24.82 for 2008 and $10.73 for the prior year. The net loss from discontinued operations was $61 million in 2008 compared with net earnings of $860 million in 2007. Our total net loss for 2008 was $27.6 billion, or $24.87 per diluted share, as compared with a net loss of $7.8 billion, or $9.69 per diluted share, in 2007.
 
2008 Compared With 2007
 
Principal transactions revenues include both realized and unrealized gains and losses on trading assets and trading liabilities and investment securities classified as trading investments. Principal transactions revenues were negative $27.2 billion in 2008 compared with negative $12.1 billion in 2007. The negative revenues in 2008 were driven primarily by net losses within FICC related to credit valuation adjustments related to hedges with financial guarantors, U.S. ABS CDOs, net losses associated with real estate-related assets, and net losses from credit spreads widening across most asset classes to significantly higher levels for the year. FICC also recorded net losses on various positions as a result of severe market dislocations, including significant asset price declines, high levels of volatility and reduced levels of liquidity, particularly following the default of a major U.S. broker-dealer and the U.S. government’s conservatorship of certain GSEs. These losses were partially offset by positive net revenues generated from our interest rate and currencies, commodities and cash equities businesses, as well as gains arising from the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities. The negative net principal transactions revenues in 2007 were primarily driven by losses associated with U.S. ABS CDOs and our residential-mortgage-related businesses, partially offset by higher revenues generated by the rates and currencies, equity-linked, cash equities trading and financing and services businesses, as well as gains arising from the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities. Principal transactions revenues are primarily reported in our GMI business segment.
 
Net interest profit is a function of (i) the level and mix of total assets and liabilities, including trading assets owned, deposits, financing and lending transactions, and trading strategies associated with our businesses, and (ii) the prevailing level, term structure and volatility of interest rates. Net interest profit is an integral component of trading activity. In assessing the profitability of our client facilitation and trading activities, we view principal transactions and net interest profit in the aggregate as net trading revenues. Changes in the composition of trading inventories and hedge positions can cause the mix of principal transactions and net interest profit to fluctuate from period to period. Net interest profit was $4.0 billion in 2008, down 27% from 2007, primarily due to decreased interest revenues generated as a result of lower asset levels and stated interest rates on those assets, partially offset by lower interest expense associated with reduced funding levels in our GMI businesses. Net interest profit is reported in both our GMI and GWM business segments.
 
Commissions revenues primarily arise from agency transactions in listed and OTC equity securities and commodities, insurance products and options. Commissions revenues also include distribution fees for


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promoting and distributing mutual funds and hedge funds. Commissions revenues were $6.9 billion in 2008, down 5% from the prior year, driven primarily by lower revenues from insurance sales and mutual funds within GWM due to challenging market conditions, which was partially offset by an increase in revenues from our global cash equity trading business resulting from higher volumes. Commissions revenues are generated by our GMI and GWM business segments.
 
Managed accounts and other fee-based revenues primarily consist of asset-priced portfolio service fees earned from the administration of separately managed and other investment accounts for retail investors, annual account fees, and certain other account-related fees. Managed accounts and other fee-based revenues were $5.5 billion in 2008, an increase of 1% from 2007, as higher revenues from the global markets financing and services and real estate principal investment businesses within GMI were offset by lower fee-based revenues in GWM due to lower asset levels as a result of difficult market conditions. Managed accounts and other fee-based revenues are primarily generated by our GWM business segment.
 
Investment banking revenues include (i) origination revenues representing fees earned from the underwriting of debt, equity and equity-linked securities, as well as loan syndication and commitment fees and (ii) strategic advisory services revenues including merger and acquisition and other investment banking advisory fees. Investment banking revenues were $3.7 billion in 2008, down 33% from 2007, driven by lower net revenues from equity origination, debt origination and M&A advisory revenues, reflecting significantly lower industry-wide underwriting and advisory transaction volumes compared with 2007. Investment banking revenues are primarily reported in our GMI business segment but also include origination revenues in GWM.
 
Earnings from equity method investments include our pro rata share of income and losses associated with investments accounted for under the equity method of accounting. Earnings from equity method investments were $4.5 billion in 2008, which includes a net pre-tax gain of $4.3 billion from the sale of our 20% ownership stake in Bloomberg, L.P. Excluding this gain, earnings from equity method investments were $0.2 billion, down from $1.6 billion in 2007 due largely to lower revenues from most investments, including alternative investment management companies. Earnings from equity method investments are reported in both our GMI and GWM business segments. Refer to Note 5 to the Consolidated Financial Statements for further information on equity method investments.
 
Other revenues include gains and losses on investment securities, including certain available-for-sale securities, gains and losses on private equity investments, and gains and losses on loans and other miscellaneous items. Other revenues were negative $10.1 billion in 2008, compared with negative $2.2 billion in 2007. The negative revenues for 2008 were primarily due to net losses from other-than-temporary impairment charges on available-for-sale securities within our U.S. banks’ investment securities portfolio of $4.1 billion, write-downs on our leveraged finance loans and commitments of $4.2 billion, and net losses of $1.9 billion related to our private equity investments due primarily to the decline in value of private and public investments. The negative net other revenues in 2007 were primarily driven by loan-related losses, other-than-temporary impairment charges on available-for-sale securities and write-downs on leveraged finance commitments.
 
Compensation and benefits expenses were $14.8 billion in 2008 and $15.9 billion in 2007. The year over year decrease primarily reflects lower incentive-based compensation costs as a result of lower net revenues and net earnings, as well as reduced headcount levels. The overall decrease in compensation and benefits expense was driven by a 30% decline in incentive-based compensation, partially offset by increased amortization of prior year stock compensation awards.
 
Non-compensation expenses were $14.5 billion, which included a $2.5 billion non-tax deductible payment to Temasek related to the July 2008 common stock offering; a $2.3 billion goodwill impairment charge related to the FICC and Investment Banking businesses; a $0.5 billion expense, including a $125 million fine, arising from Merrill Lynch’s offer to repurchase ARS from our private clients and the associated settlement with regulators; and a $0.5 billion restructuring charge associated with headcount reduction initiatives. Excluding the aforementioned items, non-compensation expenses


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were $8.7 billion, up 6% from 2007. Communication and technology costs were $2.2 billion, up 7% due primarily to costs related to ongoing technology investments and system development initiatives. The increase also reflected higher costs associated with technology equipment depreciation and market data information costs. Occupancy and related depreciation costs were $1.3 billion, up 11% due principally to higher office rental expenses associated with data center growth and increased office space, including the impact of First Republic Bank (“First Republic”), which was acquired in September 2007. Advertising and market development costs were $652 million, down 17% due primarily to lower travel and entertainment expenses. Other expenses were $2.4 billion, which included the $0.5 billion expense related to the ARS settlement previously discussed and $1.1 billion of litigation accruals. The majority of the litigation accruals are related to class action litigation, including $0.6 billion of proposed settlements of sub-prime-related class actions that have been reached in connection with claims by persons who invested in Merrill Lynch securities (see Note 11 to the Consolidated Financial Statements). Excluding these items, other expenses were $0.8 billion, a decrease of 47% from 2007.
 
Income tax benefits from continuing operations were a net credit of $14.3 billion in 2008, reflecting tax benefits associated with our pre-tax losses. The effective tax rate in 2008 was 34.1% compared with 32.7% for 2007. The increase in the effective tax rate reflected changes in the firm’s geographic mix of earnings and the impact of tax benefits on losses.


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U.S. ABS CDO and Other Mortgage-Related Activities
 
The challenging market conditions that have existed since the second half of 2007, particularly those relating to the credit markets, continued throughout 2008. Although the greatest impact to date had been on U.S. ABS CDOs and the U.S. sub-prime residential mortgage products, the adverse conditions in the credit markets have also affected other products, including U.S. Alt-A, non-U.S. residential mortgages and commercial real estate. In addition, these conditions also negatively affected the value of leveraged lending transactions and our exposure to monoline financial guarantors. The following discussion details our activities and net exposures as of December 26, 2008.
 
Residential Mortgage-Related Activities (excluding U.S. banks’ investment securities portfolio)
 
U.S. Prime: We had net exposures of $34.8 billion at December 26, 2008, which consisted primarily of prime mortgage whole loans, including approximately $31.1 billion of prime loans originated with GWM clients (of which $15.0 billion were originated by First Republic, an operating division of Merrill Lynch Bank & Trust Co., FSB (“MLBT-FSB”)). Net exposures related to U.S. prime residential mortgages increased 25% during 2008 as a result of loan originations within GWM’s high net worth client base.
 
In addition to our U.S. prime related net exposures, we also had net exposures related to other residential mortgage-related activities. These activities consisted of the following:
 
U.S. Sub-prime: We define sub-prime mortgages as single-family residential mortgages that have more than one high risk characteristic, such as: (i) the borrower has a low FICO score (generally below 660); (ii) the mortgage has a high loan-to-value (“LTV”) ratio (LTV greater than 80% without borrower paid mortgage insurance); (iii) the borrower has a high debt-to-income ratio (greater than 45%); or (iv) the mortgage was underwritten based on stated/limited income documentation. Sub-prime mortgage-related securities are those securities that derive more than 50% of their value from sub-prime mortgages.
 
We had net exposures of $195 million at December 26, 2008, down from $2.7 billion at December 28, 2007 primarily due to $1.4 billion in net losses, sales of whole loans, and increased short positions. Our U.S. Sub-prime exposures consisted primarily of non-performing loans (valued using discounted liquidation values) and secondary trading exposures related to our residential mortgage-backed securities business, which consist of trading activity including credit default swaps (“CDS”) on single names and indices. We value residential mortgage-backed securities based on observable prices and where prices are not observable, values are based on modeling the present value of projected cash flows that we expect to receive, based on the actual and projected performance of the mortgages underlying a particular securitization. Key determinants affecting our estimates of future cash flows include estimates for borrower prepayments, delinquencies, defaults and loss severities.
 
U.S. Alt-A: We define Alt-A mortgages as single-family residential mortgages that are generally higher credit quality than sub-prime loans but have characteristics that would disqualify the borrower from a traditional prime loan. Alt-A lending characteristics may include one or more of the following: (i) limited documentation; (ii) high combined-loan-to-value (“CLTV”) ratio (CLTV greater than 80%); (iii) loans secured by non-owner occupied properties; or (iv) debt-to-income ratio above normal limits.
 
We had net exposures of $27 million at December 26, 2008, down from $2.7 billion at December 28, 2007 primarily due to net losses of $1.5 billion and sales of related positions. These net exposures resulted from secondary market trading activity or were retained from our securitizations of Alt-A residential mortgages, which were purchased from third-party mortgage originators.
 
Non-U.S.: We had net exposures of $3.4 billion at December 26, 2008, which consisted primarily of residential mortgage whole loans originated in the U.K., as well as through mortgage originators in the Pacific Rim and asset-based lending facilities backed by residential whole loans. Non-U.S. net exposures decreased 64% during 2008 due primarily to net losses of $1.9 billion, paydowns of principal, sales of mortgage-backed securities, maturity of a warehouse lending facility and securitization activity in the U.K. Held for sale loans are carried at the lower of cost or market value;


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for those loans carried at market value, given the significant illiquidity in the securitization market, values are based on modeling the present value of projected cash flows that we expect to receive, based on the actual and projected performance of the mortgages. Key determinants affecting our estimates of future cash flows include estimates for borrower prepayments, delinquencies, defaults, and loss severities.
 
The following table provides a summary of our residential mortgage-related net exposures and losses, excluding net exposures to residential mortgage-backed securities held in our U.S. banks’ investment securities portfolio, which are described in the U.S. Banks’ Investment Securities Portfolio section below.
 
                                 
(dollars in millions)
 
    Net
          Net
    exposures as
      Other net changes
  exposures as
    of Dec. 28,
  Net gains/(losses)
  in net
  of Dec. 26,
    2007   reported in income   exposures(1)   2008
 
Residential Mortgage-Related (excluding U.S. banks’ investment securities portfolio):
                               
U.S. Prime(2)
  $ 27,789     $ 76     $ 6,934     $ 34,799  
                                 
Other Residential:
                               
U.S. Sub-prime
  $ 2,709     $ (1,355 )   $ (1,159 )   $ 195  
U.S. Alt-A
    2,687       (1,461 )     (1,199 )     27  
Non-U.S.
    9,379       (1,866 )     (4,133 )     3,380  
                                 
Total Other Residential(3)
  $ 14,775     $ (4,682 )   $ (6,491 )   $ 3,602  
                                 
 
 
(1) Represents U.S. Prime originations, foreign exchange revaluations, hedges, paydowns, maturities, changes in loan commitments and related funding.
(2) As of December 26, 2008, net exposures include approximately $31.1 billion of prime loans originated with GWM clients (of which $15.0 billion were originated by First Republic Bank).
(3) Includes warehouse lending, whole loans and residential mortgage-backed securities.
 
U.S. ABS CDO Activities
 
In addition to our U.S. sub-prime residential mortgage-related exposures, we have exposure to U.S. ABS CDOs, which are securities collateralized by a pool of asset-backed securities (“ABS”), for which the underlying collateral is primarily sub-prime residential mortgage loans.
 
We engaged in the underwriting and sale of U.S. ABS CDOs, which involved the following steps: (i) determining investor interest or responding to inquiries or mandates received; (ii) engaging a collateralized debt obligation (“CDO”) collateral manager who is responsible for selection of the ABS securities that will become the underlying collateral for the U.S. ABS CDO securities; (iii) obtaining credit ratings from one or more rating agencies for U.S. ABS CDO securities; (iv) securitizing and pricing the various tranches of the U.S. ABS CDO at representative market rates; and (v) distributing the U.S. ABS CDO securities to investors or retaining them for Merrill Lynch. As a result of the continued deterioration in the sub-prime mortgage market, we did not underwrite any U.S. ABS CDOs in 2008.
 
Our U.S. ABS CDO net exposure primarily consists of our super senior ABS CDO portfolio, as well as secondary trading exposures related to our ABS CDO business.
 
Super senior positions represent our exposure to the senior most tranche in an ABS CDO’s capital structure. This tranche’s claims have priority to the proceeds from liquidated cash ABS CDO assets.


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At the end of 2008, net exposures to U.S. super senior ABS CDOs were $708 million, down from $6.8 billion at the end of 2007. The remaining net exposure is predominantly comprised of U.S. super senior ABS CDOs based on mezzanine underlying collateral.
 
The aggregate U.S. super senior ABS CDO long exposures were $1.8 billion, substantially reduced from $30.4 billion at the end of 2007. The reduction predominantly resulted from the sale of ABS CDOs to an affiliate of Lone Star discussed below, which decreased long exposures by $11.1 billion, which includes a loss of $4.4 billion. Our long exposure was further reduced during the year by other mark-to-market adjustments, excluding credit valuation adjustments, of $13.4 billion, $3.2 billion of which related to additional sales in the fourth quarter of 2008, and $0.9 billion primarily related to amortization and liquidations.
 
At year end, the super senior ABS CDO long exposure was hedged with an aggregate of $1.1 billion of short exposure, which was down from $23.6 billion at the end of 2007. This reduction primarily reflected $7.8 billion from the termination and settlement of related hedges with monolines and insurance companies, $7.5 billion of mark-to-market gains, $6.5 billion of hedge ineffectiveness and $0.6 billion of amortization and liquidations.
 
The following table provides an overview of changes to our U.S. super senior ABS CDO net exposures from December 28, 2007 to December 26, 2008.
 
                         
(dollars in millions)
 
U.S. Super Senior ABS CDO Exposure   Long   Short(1)   Net
 
December 28, 2007
  $ 30,432     $ (23,597 )   $ 6,835  
Exposure Changes:
                       
Sale of CDOs(2)
    (10,011 )     -       (10,011 )
Termination and Settlement of Monoline and Insurance Company Hedges(3)
    -       7,825       7,825  
Hedge Ineffectiveness
    -       6,543       6,543  
Gains / (Losses)(4)
    (17,765 )     7,483       (10,282 )
Other(5)
    (851 )     649       (202 )
                         
December 26, 2008
  $ 1,805     $ (1,097 )   $ 708  
                         
 
 
(1) Hedges are affected by a variety of factors that impact the degree of their effectiveness. These factors may include differences in attachment point, timing of cash flows, control rights, limited recourse to counterparties and other basis risks.
(2) Primarily consists of $6.7 billion of assets sold to Lone Star.
(3) Primarily consists of termination of trades with ACA $(3.4) billion, AIG $(3.2) billion, and XL $(1.2) billion.
(4) Primarily consists of loss on sale to Lone Star of $(4.4) billion and mark to market losses on CDO’s of $(5.9) billion.
(5) Primarily consists of liquidations and amortizations.
 
Merrill Lynch’s secondary trading exposure related to its ABS CDO business was ($281) million at December 26, 2008. As of December 28, 2007, secondary trading exposure was ($2.0) billion. The change in exposure was driven by liquidations, unwinds, and net gains / (losses) recognized.
 
On July 28, 2008, we agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs (the “Portfolio”) to an entity owned and controlled by Lone Star for a purchase price of $6.7 billion. The transaction closed on September 18, 2008. In connection with this sale we recorded a pre-tax write-down of $4.4 billion in 2008. We provided a financing loan to the purchaser for approximately 75% of the purchase price. The recourse on this loan is limited to the assets of the purchaser, which consist solely of the Portfolio. All cash flows and distributions from the Portfolio (including sale proceeds) will be applied in accordance with a specified priority of payments. The loan is carried at fair value. Events of default under the loan are customary events of default, including failure to pay interest when due and failure to pay principal at maturity. As of December 26, 2008, all scheduled payments on the loan have been received.


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Monoline Financial Guarantors
 
We hedge a portion of our long exposures of U.S. super senior ABS CDOs with various market participants, including financial guarantors. We define financial guarantors as monoline insurance companies that provide credit support for a security either through a financial guaranty insurance policy on a particular security or through an instrument such as a credit default swap (“CDS”). Under a CDS, the financial guarantor generally agrees to compensate the counterparty to the swap for the deterioration in the value of the underlying security upon an occurrence of a credit event, such as a failure by the underlying obligor on the security to pay principal and/or interest.
 
We hedged a portion of our long exposures to U.S. super senior ABS CDOs with certain financial guarantors through the execution of CDS that are structured to replicate standard financial guaranty insurance policies, which provide for timely payment of interest and/or ultimate payment of principal at their scheduled maturity date. CDS gains and losses are based on the fair value of the referenced ABS CDOs. Depending upon the creditworthiness of the financial guarantor hedge counterparties, we may record credit valuation adjustments in estimating the fair value of the CDS.
 
At December 26, 2008, the carrying value of our hedges with financial guarantors related to U.S. super senior ABS CDOs was $1.5 billion, reduced from $3.5 billion at December 28, 2007. The decrease was primarily due to the termination and settlement of monoline hedges.
 
The following table provides a summary of our total financial guarantor exposures for U.S. super senior ABS CDOs from December 28, 2007 to December 26, 2008.
 
                                         
(dollars in millions)
 
            Mark-to-
       
            Market Prior
  Life-to-Date
   
            to Credit
  Credit
   
Credit Default Swaps with Financial
  Notional of
  Net
  Valuation
  Valuation
  Carrying
Guarantors on U.S. Super Senior ABS CDOs   CDS   Exposure   Adjustments   Adjustments   Value
 
December 28, 2007
  $ (19,901 )   $ (13,839 )   $ 6,062     $ (2,608 )   $ 3,454  
Settlement and potential termination of monoline hedges on long positions sold(1)
    16,959       9,538       (7,421 )     5,626       (1,795 )
Gains/(losses) and other activity
    111       3,822       3,711       (3,912 )     (201 )
                                         
December 26, 2008
  $ (2,831 )   $ (479 )   $ 2,352     $ (894 )   $ 1,458  
                                         
 
 
 
(1) We terminated all of our CDO-related hedges with XL, which at the time of sale had a carrying value of $1.0 billion, in exchange for an upfront payment of $500 million. This termination resulted in a net loss of $529 million.
 
In addition to hedges with financial guarantors on U.S. super senior ABS CDOs, we also have hedges on certain long exposures related to corporate CDOs, Collateralized Loan Obligations (“CLOs”), Residential Mortgage-Backed Securities (“RMBS”) and Commercial Mortgage-Backed Securities (“CMBS”). At December 26, 2008, the carrying value of our hedges with financial guarantors related to these types of exposures was $7.8 billion, of which approximately 50% pertains to CLOs and various high grade basket trades. The other 50% relates primarily to CMBS and RMBS in the U.S. and Europe.


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The following table provides a summary of our total financial guarantor exposures to other referenced assets, as described above, other than U.S. super senior ABS CDOs, as of December 26, 2008.
 
                                         
(dollars in millions)
 
            Mark-to-
       
            Market Prior
  Life-to-Date
   
            to Credit
  Credit
   
Credit Default Swaps with Financial
  Notional of
  Net
  Valuation
  Valuation
  Carrying
Guarantors (Excluding U.S. Super Senior ABS CDO)   CDS(1)   Exposure(2)   Adjustments   Adjustments   Value
 
By counterparty credit quality(3)
                                       
AAA
  $ (17,293 )   $ (13,718 )   $ 3,575     $ (804 )   $ 2,771  
AA
    (16,672 )     (11,851 )     4,821       (1,832 )     2,989  
A
    (1,197 )     (879 )     318       (118 )     200  
BBB
    (5,570 )     (4,522 )     1,048       (440 )     608  
Non-investment grade or unrated
    (9,581 )     (6,570 )     3,011       (1,809 )     1,202  
                                         
Total financial guarantor exposures
  $ (50,313 )   $ (37,540 )   $ 12,773     $ (5,003 )   $ 7,770  
                                         
 
 
 
(1) Represents the gross notional amount of CDS purchased as protection to hedge predominantly Corporate CDO, CLO, RMBS and CMBS exposure. Amounts do not include exposure with financial guarantors on U.S. super senior ABS CDOs which are reported separately above.
(2) Represents the notional of the total CDS, net of gains prior to credit valuation adjustments.
(3) Represents S&P rating band as of December 26, 2008.
 
On February 18, 2009, one of the monoline financial guarantors included in the tables above with whom we have a significant relationship announced a reorganization plan. We are currently evaluating the impacts of the reorganization, including rating downgrades and the impact on our 2009 financial results. See “Executive Overview — Other Events” on page 21 for a discussion of the U.S. government’s agreement to provide assistance to Bank of America in the Merrill Lynch acquisition.
 
U.S. Banks’ Investment Securities Portfolio
 
The investment securities portfolio of Merrill Lynch Bank USA (“MLBUSA”) and MLBT-FSB includes investment securities comprising various asset classes. During the fourth quarter of 2008, in order to manage capital at MLBUSA, certain investment securities were transferred from MLBUSA to a consolidated non-bank entity. This transfer had no impact on how the investment securities were valued or the subsequent accounting treatment. As of December 26, 2008, the net exposure of this portfolio was $10.4 billion, which included investment securities of approximately $6.0 billion recorded in the non-bank legal entity. The cumulative pre-tax balance in other comprehensive (loss)/income related to this portfolio was approximately negative $9.3 billion as of December 26, 2008. We regularly (at least quarterly) evaluate each security whose value has declined below amortized cost to assess whether the decline in fair value is other-than-temporary. Within this investment securities portfolio, net pre-tax losses of approximately $4.1 billion were recognized through the statement of earnings during 2008. These net losses primarily reflected the other-than-temporary impairment in the value of certain securities, primarily U.S. Alt-A residential mortgage-backed securities.
 
We value RMBS based on observable prices and where prices are not observable, values are based on modeling the present value of projected cash flows that we expect to receive, based on the actual and projected performance of the mortgages underlying a particular securitization. Key determinants affecting our estimates of future cash flows include estimates for borrower prepayments, delinquencies, defaults, and loss severities.
 
A decline in a debt security’s fair value is considered to be other-than-temporary if it is probable that not all amounts contractually due will be collected. In assessing whether it is probable that all amounts contractually due will not be collected, we consider the following:
 
•  Whether there has been an adverse change in the estimated cash flows of the security;
•  The period of time over which it is estimated that the fair value will increase from the current level to at least the amortized cost level, or until principal and interest is estimated to be received;


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•  The period of time a security’s fair value has been below amortized cost;
•  The amount by which the security’s fair value is below amortized cost;
•  The financial condition of the issuer; and
•  Management’s ability and intent to hold the security until fair value recovers or until the principal and interest is received.
 
Refer to Note 5 to the Consolidated Financial Statements for additional information.
 
The following table provides a summary of our U.S. banks’ investment securities portfolio net exposures and losses.
 
                                                 
(dollars in millions)
 
    Net
  Net
  Unrealized
  Other
  Net
   
    Exposures
  Gains/(Losses)
  Gains/(Losses)
  Net Changes
  Exposures
   
    as of Dec. 28,
  Reported in
  Included in OCI
  in Net
  as of Dec. 26,
  Cumulative
    2007   Income(2)   (pre-tax)   Exposures(3)   2008   OCI (pre-tax)
 
U.S. Banks’ Investment Securities Portfolio:
                                               
Sub-prime residential mortgage-backed securities
  $ 4,161     $ (485 )   $ (1,200 )   $ (463 )   $ 2,013     $ (1,942 )
Alt-A residential mortgage-backed securities
    7,120       (3,028 )     (1,179 )     (618 )     2,295       (1,999 )
Commercial mortgage-backed securities
    5,791       (117 )     (3,186 )     637       3,125       (3,499 )
Prime residential mortgage-backed securities
    4,174       (349 )     (837 )     (1,143 )     1,845       (1,075 )
Non-residential asset-backed securities
    1,214       (27 )     (178 )     (383 )     626       (216 )
Non-residential CDOs
    903       (101 )     (407 )     (66 )     329       (483 )
Other
    240       (1 )     (56 )     15       198       (75 )
                                                 
Total(1)
  $ 23,603     $ (4,108 )   $ (7,043 )   $ (2,021 )   $ 10,431     $ (9,289 )
 
 
 
(1) The December 26, 2008 net exposures include investment securities of approximately $6.0 billion recorded in a non-bank legal entity.
(2) Primarily represents losses on certain securities deemed to be other-than-temporarily impaired.
(3) Primarily represents principal paydowns, sales and hedges.
 
The continued adverse market environment and its potential impact on the underlying securitized assets could result in further other-than-temporary impairments in our U.S. banks’ investment securities portfolio in 2009.
 
Commercial Real Estate
 
As of December 26, 2008, net exposures related to commercial real estate, excluding First Republic, totaled approximately $9.7 billion, down 49% from December 28, 2007, due primarily to asset sales of whole loan/conduit exposures in the U.S. and Europe and net write-downs. Net exposures related to First Republic were $3.1 billion at the end of 2008, up 36% from 2007 primarily due to new originations.


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The following table provides a summary of our Commercial Real Estate portfolio net exposures from December 28, 2007 to December 26, 2008.
 
                                 
(dollars in millions)
 
        Net
      Net
    Net Exposures
  Gains/(Losses)
  Other Net
  Exposures
    as of Dec. 28,
  Reported in
  Changes in Net
  as of Dec. 26,
    2007   Income   Exposures(1)   2008
 
Commercial Real Estate:
                               
Whole Loans/Conduits
  $ 11,585     $ (1,548 )   $ (6,192 )   $ 3,845  
Securities and Derivatives
    (123 )     (78 )     375       174  
Real Estate Investments(2)
    7,486       (358 )     (1,443 )     5,685  
                                 
Total Commercial Real Estate, excluding First Republic
  $ 18,948     $ (1,984 )   $ (7,260 )   $ 9,704  
                                 
First Republic Bank
  $ 2,300     $ 71     $ 748     $ 3,119  
 
 
 
(1) Primarily represents sales, paydowns and foreign exchange revaluations.
(2) The Company makes equity and debt investments in entities whose underlying assets are real estate. The Company consolidates those entities in which we are the primary beneficiary in accordance with FIN No. 46(R), Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51. The Company does not consider itself to have economic exposure to the total underlying assets in those entities. The amounts presented are the Company’s net investment and therefore exclude the amounts that have been consolidated but for which the Company does not consider itself to have economic exposure.


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Business Segments
 
Our operations are organized into two business segments: GMI and GWM. We also record revenues and expenses within a “Corporate” category. Corporate results primarily include unrealized gains and losses related to interest rate hedges on certain debt. In addition, Corporate results for the year ended December 26, 2008 included expenses of $2.5 billion related to the payment to Temasek, $0.5 billion associated with the ARS repurchase program, and $0.7 billion of litigation accruals recorded in 2008. Net revenues and pre-tax losses recorded within Corporate for 2008 were $1.1 billion and $2.6 billion, respectively, as compared with net revenues and pre-tax losses of negative $103 million and $116 million, respectively, in the prior year period.
 
The following segment results represent the information that is relied upon by management in its decision-making processes. Revenues and expenses associated with inter-segment activities are recognized in each segment. In addition, revenue and expense sharing agreements for joint activities between segments are in place, and the results of each segment reflect their agreed-upon apportionment of revenues and expenses associated with these activities. See Note 2 to the Consolidated Financial Statements for further information. Segment results are presented from continuing operations and exclude results from discontinued operations. Refer to Note 16 to the Consolidated Financial Statements for additional information on discontinued operations.
 
Global Markets and Investment Banking
 
GMI provides trading, capital markets services, and investment banking services to issuer and investor clients around the world. The Global Markets division consists of the FICC and Equity Markets sales and trading activities for investor clients and on a proprietary basis, while the Investment Banking division provides a wide range of origination and strategic advisory services for issuer clients.
 
GMI Results of Operations
 
                         
(dollars in millions)
 
            % Change
            2008 vs.
    2008   2007   2007
 
Global Markets
                       
FICC
  $ (37,423 )   $ (15,873 )     N/M %
Equity Markets
    7,668       8,286       (7 )
                         
Total Global Markets revenues, net of interest
                       
expense
    (29,755 )     (7,587 )     N/M  
                         
Investment Banking
                       
Origination:
                       
Debt
    931       1,550       (40 )
Equity
    1,047       1,629       (36 )
Strategic Advisory Services
    1,317       1,740       (24 )
                         
Total Investment Banking revenues, net of interest
                       
expense
    3,295       4,919       (33 )
                         
Total GMI revenues, net of interest expense
    (26,460 )     (2,668 )     N/M  
                         
Non-interest expenses before restructuring charge
    14,753       13,677       8  
Restructuring charge
    331       -       N/M  
                         
Pre-tax loss from continuing operations
  $ (41,544 )   $ (16,345 )     N/M  
                         
Pre-tax profit margin
    N/M       N/M          
Total full-time employees
    9,700       12,300          
 
 
N/M = Not Meaningful


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GMI recorded negative net revenues and a pre-tax loss from continuing operations in 2008 of $26.5 billion and $41.5 billion, respectively, as the difficult market conditions that existed during the year contributed to net losses in FICC and lower net revenues in Equity Markets and Investment Banking. The 2008 pre-tax loss was primarily driven by the net write-downs within FICC that are discussed below, as well as a $2.3 billion impairment charge related to goodwill. Partially offsetting these losses was a net gain of approximately $5.1 billion recorded by GMI during 2008 due to the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities.
 
GMI’s 2007 net revenues were negative $2.7 billion, and the pre-tax loss from continuing operations was $16.3 billion. The 2007 loss was primarily driven by net write-downs within FICC, including $20.9 billion related to U.S. ABS CDOs and residential mortgage-related exposures and $3.1 billion related to valuation adjustments against guarantor counterparties. GMI’s 2007 net revenues also included a net gain of approximately $1.9 billion due to the impact of the widening of Merrill Lynch’s credit spreads on the carrying value of certain of our long-term debt liabilities.
 
Fixed Income, Currencies and Commodities (FICC)
 
During 2008, FICC was adversely impacted by extremely difficult market conditions, particularly during the second half of the year. Such conditions included the continuing deterioration in the credit markets, lower levels of liquidity, reduced price transparency, asset price declines, increased volatility and severe market dislocations, particularly following the default of a major U.S. broker-dealer and the U.S. Government’s conservatorship of certain GSEs.
 
In 2008, FICC recorded approximately $10.2 billion of net write-downs related to U.S. ABS CDOs, approximately $4.4 billion of which related to the sale of U.S. super senior ABS CDOs conducted during the third quarter. In addition, as a result of the deteriorating environment for financial guarantors, FICC also recorded credit valuation adjustments related to hedges with financial guarantors of negative $10.4 billion. FICC’s net revenues were also adversely impacted by net losses related to our U.S. banks’ investment securities portfolio of $4.1 billion and certain of our U.S. sub-prime, U.S. Alt-A and Non-U.S. residential mortgage-related exposures aggregating approximately $4.6 billion. FICC also recognized net write-downs related to leveraged finance loans and commitments of approximately $4.2 billion and $1.9 billion of net write-downs related to commercial real estate. These losses were partially offset by a foreign currency gain of $2.6 billion related to currency hedges of our U.K. deferred tax assets recognized in the fourth quarter of 2008 and a net gain of approximately $3.7 billion related to the impact of the widening of our credit spreads on the carrying value of certain of our long-term debt liabilities. In addition, net revenues for most other FICC businesses declined from 2007, as the environment for those businesses was materially worse than the prior-year.
 
In 2007, FICC net revenues were negative $15.9 billion as strong revenues in global rates and global currencies were more than offset by declines in the global credit and structured finance and investments businesses. FICC’s 2007 net revenues included net writedowns of approximately $20.9 billion related to U.S. ABS CDOs and residential mortgage-related exposures and $3.1 billion related to valuation adjustments against guarantor counterparties, which were partially offset by a net benefit of approximately $1.2 billion related to the impact of the widening of our credit spreads on the carrying value of certain of our long-term debt liabilities.
 
Equity Markets
 
Equity Markets net revenues for 2008 were $7.7 billion compared with $8.3 billion in the prior-year period. Net revenues in 2008 included a gain of $4.3 billion from the sale of the investment in Bloomberg L.P. as well as a gain of $1.4 billion related to changes in the carrying value of certain of our long-term debt liabilities. These gains were more than offset by declines from other equity products, including cash and global equity-linked products. In addition, private equity recorded negative net revenues of $2.1 billion in 2008 as compared with net revenues of $0.4 billion in 2007.


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For 2007, Equity Markets net revenues were a record $8.3 billion, driven by our equity-linked business, which was up nearly 80%, global cash equity trading business which was up over 30% and global markets financing and services business, which includes prime brokerage, which was up over 45%. Equity Markets 2007 net revenues included a gain of approximately $700 million related to changes in the carrying value of certain of our long-term debt liabilities.
 
Investment Banking
 
For 2008, Investment Banking net revenues were $3.3 billion, down 33% from a record $4.9 billion in the prior-year period, as the difficult market conditions that existed in 2008 resulted in lower industry-wide transaction volumes across all product lines.
 
Origination
 
Origination revenues represent fees earned from the underwriting of debt, equity, and equity-linked securities, as well as loan syndication fees.
 
For 2008, origination revenues were $2.0 billion, down 38% from the year-ago period. Debt and equity originations were down 40% and 36%, respectively, compared with 2007, primarily reflecting lower industry-wide transaction volumes in 2008.
 
Strategic Advisory Services
 
Strategic advisory services net revenues, which include merger and acquisition and other advisory fees, were $1.3 billion in 2008, a decrease of 24% from the prior-year. The decline was primarily due to lower industry-wide transaction activity, which reflected the high level of volatility in the global financial markets, economic uncertainty and a lack of available liquidity in the credit markets.
 
Global Wealth Management
 
GWM, our full-service retail wealth management segment, provides brokerage, investment advisory and financial planning services. GWM is comprised of GPC and GIM.
 
GPC provides a full range of wealth management products and services to assist clients in managing all aspects of their financial profile principally through our FA network.
 
GIM includes our interests in creating and managing wealth management products, including alternative investment products for clients. GIM also includes our share of net earnings from our ownership positions in other investment management companies, including BlackRock.


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GWM Results of Operations
 
                         
(dollars in millions)
 
            %
            Change
            2008 vs.
    2008   2007   2007
 
GPC
                       
Fee-based revenues
  $ 6,171     $ 6,278       (2 )%
Transactional and origination revenues
    3,313       3,887       (15 )
Net interest profit and related hedges(1)
    2,337       2,318       1  
Other revenues
    288       416       (31 )
                         
Total GPC revenues, net of interest expense
    12,109       12,899       (6 )
                         
GIM
                       
Total GIM revenues, net of interest expense
    669       1,122       (40 )
                         
Total GWM revenues, net of interest expense
    12,778       14,021       (9 )
                         
Non-interest expenses before restructuring charge
    10,277       10,391       (1 )
Restructuring charge
    155       -       N/M  
                         
Pre-tax earnings from continuing operations
  $ 2,346     $ 3,630       (35 )
                         
Pre-tax profit margin
    18.4 %     25.9 %        
Total full-time employees
    29,400       31,000          
Total Financial Advisors
    16,090       16,740          
 
 
N/M = Not Meaningful
(1) Includes the interest component of non-qualifying derivatives, which are included in other revenues on the Consolidated Statements of (Loss)/Earnings.
 
For 2008, GWM’s net revenues were $12.8 billion, down 9% from the prior-year period, primarily due to declines in transactional and origination revenues. GWM recorded $2.3 billion of pre-tax earnings from continuing operations, down 35% from the year-ago period. The pre-tax profit margin was 18.4%, down from 25.9% in the prior-year period. Excluding the impact of the $155 million restructuring charge, GWM’s pre-tax earnings were $2.5 billion, a decline of 31% from 2007. On the same basis, the pre-tax profit margin was 19.6%.
 
GWM’s net revenues in 2007 were $14.0 billion, reflecting strong growth in both GPC’s and GIM’s businesses. GWM generated $3.6 billion of pre-tax earnings from continuing operations. The pre-tax profit margin was 25.9% in 2007.
 
Global Private Client
 
GPC’s 2008 net revenues were $12.1 billion, down 6% from the year-ago period, driven by lower transactional and origination revenues, resulting from reduced client and origination activity in a challenging market environment.
 
Financial Advisor headcount was 16,090 at the end of 2008, a decrease of 650 FAs during the year.
 
Fee-Based Revenues
 
GPC generated $6.2 billion of fee-based revenues in 2008, down 2% from 2007, reflecting lower asset levels in annuitized fee-based products resulting from market declines, partially offset by the inclusion of fee-based accounts from First Republic, which was acquired in September 2007.


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The value of client assets in GWM accounts at year-end 2008 and 2007 were as follows:
 
                 
(dollars in billions)
 
    2008   2007
 
Assets in client accounts:
               
U.S.
  $ 1,125     $ 1,586  
Non-U.S.
    122       165  
                 
Total
  $ 1,247     $ 1,751  
                 
Assets in Annuitized-Revenue Products
  $ 466     $ 655  
 
 
 
Total client assets in GWM accounts were $1.2 trillion, down from $1.8 trillion in 2007. Total net new money was negative $12 billion for 2008 and was adversely affected by client reaction to persistent volatility and significantly negative market movements during the year. GWM’s net inflows of client assets into annuitized-revenue products were $11 billion for 2008. Assets in annuitized-revenue products ended 2008 at $466 billion, down from $655 billion in 2007. The decrease in total client assets and assets in annuitized-revenue products in GWM accounts during 2008 was primarily due to market depreciation.
 
Transactional and Origination Revenues
 
Transactional and origination revenues were $3.3 billion in 2008, down 15% from the prior-year due to lower client transaction and origination volumes amidst increasingly challenging market conditions.
 
Net Interest Profit and Related Hedges
 
Net interest profit (interest revenues less interest expenses) and related hedges include GPC’s allocation of the interest spread earned in our banking subsidiaries for deposits, as well as interest earned, net of provisions for loan losses, on securities-based loans, mortgages, small- and middle-market business and other loans, corporate funding allocations, and the interest component of non-qualifying derivatives.
 
For 2008, net interest profit and related hedges were $2.3 billion, up slightly from 2007.
 
Other Revenues
 
For 2008, other revenues were down 31% to $288 million, primarily due to lower gains on sales of mortgages and markdowns on certain alternative investments.
 
Global Investment Management
 
GIM includes revenues from the creation and management of hedge fund and other alternative investment products for clients, as well as our share of net earnings from our ownership positions in other investment management companies, including BlackRock. Under the equity method of accounting, an estimate of the net earnings associated with our approximately half economic ownership interest in BlackRock is recorded in the GIM portion of the GWM segment.
 
GIM’s 2008 revenues were $669 million, down 40% from the year-ago period, primarily due to lower revenues from our investments in investment management companies.
 
Off-Balance Sheet Exposures
 
As a part of our normal operations, we enter into various off-balance sheet arrangements that may require future payments. The table and discussion below outline our significant off-balance sheet


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arrangements, as well as their future expirations, as of December 26, 2008. Refer to Note 11 to the Consolidated Financial Statements for further information:
 
                                         
(dollars in millions)
    Expiration
        Less than
  1 - 3
  3+ - 5
  Over 5
    Total   1 Year   Years   Years   Years
 
Standby liquidity facilities
  $ 9,144     $ 6,279     $ -     $ 2,849     $ 16  
Auction rate security guarantees
    5,235       -       5,235       -       -  
Residual value guarantees
    738       322       96       320       -  
Standby letters of credit and other guarantees
    40,499       825       2,738       690       36,246  
 
 
 
Standby Liquidity Facilities
 
Merrill Lynch provides standby liquidity facilities to certain municipal bond securitization special purpose entities (“SPEs”). In these arrangements, Merrill Lynch is required to fund these standby liquidity facilities if the fair value of the assets held by the SPE declines below par value and certain other contingent events take place. In those instances where the residual interest in the securitized trust is owned by a third party, any payments under the facilities are offset by economic hedges entered into by Merrill Lynch. In those instances where the residual interest in the securitized trust is owned by Merrill Lynch, any requirement to pay under the facilities is considered remote because Merrill Lynch, in most instances, will purchase the senior interests issued by the trust at fair value as part of its dealer market-making activities. However, Merrill Lynch will have exposure to these purchased senior interests. Refer also to Note 6 to the Consolidated Financial Statements for further information.
 
Auction Rate Security Guarantees
 
Under the terms of its announced purchase program as augmented by the global agreement reached with the New York Attorney General, the Securities and Exchange Commission, the Massachusetts Securities Division and other state securities regulators, Merrill Lynch agreed to purchase ARS at par from its retail clients, including individual, not-for-profit, and small business clients. Certain retail clients with less than $4 million in assets with Merrill Lynch as of February 13, 2008 were eligible to sell eligible ARS to Merrill Lynch starting on October 1, 2008. Other eligible retail clients meeting specified asset requirements were eligible to sell ARS to Merrill Lynch beginning on January 2, 2009. The final date of the ARS purchase program is January 15, 2010. Under the ARS purchase program, the eligible ARS held in accounts of eligible retail clients at Merrill Lynch as of December 26, 2008 was $5.2 billion. As of December 26, 2008 Merrill Lynch had purchased $3.2 billion of ARS from eligible clients. In addition, under the ARS purchase program, Merrill Lynch has agreed to purchase ARS from retail clients who purchased their securities from Merrill Lynch and transferred their accounts to other brokers prior to February 13, 2008. At December 26, 2008, a liability of $278 million has been recorded for our estimated exposure related to this guarantee.
 
Residual Value Guarantees
 
At December 26, 2008 residual value guarantees of $738 million included amounts associated with the Hopewell, NJ campus, aircraft leases and certain power plant facilities.
 
Standby Letters of Credit and Other FIN 45 Guarantees
 
Merrill Lynch provides guarantees to certain counterparties in the form of standby letters of credit in the amount of $2.6 billion. At December 26, 2008, Merrill Lynch held marketable securities of $419 million as collateral to secure these guarantees.
 
In conjunction with certain mutual funds, Merrill Lynch guarantees the return of principal investments or distributions as contractually specified. At December 26, 2008, Merrill Lynch’s maximum potential


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exposure to loss with respect to these guarantees is $298 million assuming that the funds are invested exclusively in other general investments (i.e., the funds hold no risk-free assets), and that those other general investments suffer a total loss. As such, this measure significantly overstates Merrill Lynch’s exposure or expected loss at December 26, 2008.
 
In connection with residential mortgage loan and other securitization transactions, Merrill Lynch typically makes representations and warranties about the underlying assets. If there is a material breach of such representations and warranties, Merrill Lynch may have an obligation to repurchase the assets or indemnify the purchaser against any loss. For residential mortgage loan and other securitizations, the maximum potential amount that could be required to be repurchased is the current outstanding asset balance. Specifically related to First Franklin activities, there is currently approximately $36 billion (including loans serviced by others) of outstanding loans that First Franklin sold in various asset sales and securitization transactions where management believes we may have an obligation to repurchase the asset or indemnify the purchaser against the loss if claims are made and it is ultimately determined that there has been a material breach related to such loans. Merrill Lynch has recognized a repurchase reserve liability of approximately $560 million at December 26, 2008 arising from these First Franklin residential mortgage sales and securitization transactions.
 
Derivatives
 
We record all derivative transactions at fair value on our Consolidated Balance Sheets. We do not monitor our exposure to derivatives based on the notional amount because that amount is not a relevant indicator of our exposure to these contracts, as it is not indicative of the amount that we would owe on the contract. Instead, a risk framework is used to define risk tolerances and establish limits to help to ensure that certain risk-related losses occur within acceptable, predefined limits. Since derivatives are recorded on the Consolidated Balance Sheets at fair value and the disclosure of the notional amounts is not a relevant indicator of risk, notional amounts are not provided for the off-balance sheet exposure on derivatives. Derivatives that meet the definition of a guarantee under FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indebtedness of Others, and credit derivatives are included in Note 11 to the Consolidated Financial Statements.
 
We also fund selected assets, including CDOs and CLOs, via derivative contracts with third-party structures, the majority of which are not consolidated on our balance sheets. Of the total notional amount of these total return swaps, approximately $6 billion is term financed through facilities provided by commercial banks and $21 billion is financed by long term funding provided by third party special purpose vehicles. In certain circumstances, we may be required to purchase these assets, which would not result in additional gain or loss to us as such exposure is already reflected in the fair value of our derivative contracts.
 
In order to facilitate client demand for structured credit products, we sell protection on high-grade collateral to, and buy protection on lesser grade collateral from, certain SPEs, which then issue structured credit notes. We also enter into other derivatives with SPEs, both Merrill Lynch and third party sponsored, including interest rate swaps, credit default swaps and other derivative instruments.
 
Involvement with SPEs
 
We transact with SPEs in a variety of capacities, including those that we help establish as well as those initially established by third parties. Our involvement with SPEs can vary and, depending upon the accounting definition of the SPE (i.e., voting rights entity (“VRE”), variable interest entity (“VIE”) or qualified special purpose entity (“QSPE”)), we may be required to reassess prior consolidation and disclosure conclusions. An interest in a VRE requires reconsideration when our equity interest or management influence changes, an interest in a VIE requires reconsideration when an event occurs that was not originally contemplated (e.g., a purchase of the SPE’s assets or liabilities), and an interest in a QSPE requires reconsideration if the entity no longer meets the definition of a QSPE. Refer to Note 1


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to the Consolidated Financial Statements for a discussion of our consolidation accounting policies. Types of SPEs with which we have historically transacted with include:
 
  •  Municipal bond securitization SPEs: SPEs that issue medium-term paper, purchase municipal bonds as collateral and purchase a guarantee to enhance the creditworthiness of the collateral.
 
  •  Asset-backed securities SPEs: SPEs that issue different classes of debt, from super senior to subordinated, and equity and purchase assets as collateral, including residential mortgages, commercial mortgages, auto leases and credit card receivables.
 
  •  ABS CDOs: SPEs that issue different classes of debt, from super senior to subordinated, and equity and purchase asset-backed securities collateralized by residential mortgages, commercial mortgages, auto leases and credit card receivables.
 
  •  Synthetic CDOs: SPEs that issue different classes of debt, from super senior to subordinated, and equity, purchase high-grade assets as collateral and enter into a portfolio of credit default swaps to synthetically create the credit risk of the issued debt.
 
  •  Credit-linked note SPEs:  SPEs that issue notes linked to the credit risk of a company, purchase high-grade assets as collateral and enter into credit default swaps to synthetically create the credit risk to pay the return on the notes.
 
  •  Tax planning SPEs: SPEs are sometimes used to legally isolate transactions for the purpose of obtaining a particular tax treatment for our clients as well as ourselves. The assets and capital structure of these entities vary for each structure.
 
  •  Trust preferred security SPEs: These SPEs hold junior subordinated debt issued by ML & Co. or our subsidiaries, and issue preferred stock on substantially the same terms as the junior subordinated debt to third party investors. We also provide a parent guarantee, on a junior subordinated basis, of the distributions and other payments on the preferred stock to the extent that the SPEs have funds legally available. The debt we issue into the SPE is classified as long-term borrowings on our Consolidated Balance Sheets. The ML & Co. parent guarantees of its own subsidiaries are not required to be recorded in the Consolidated Financial Statements.
 
  •  Conduits: Generally, entities that issue commercial paper and subordinated capital, purchase assets, and enter into total return swaps or repurchase agreements with higher-rated counterparties, particularly banks. The Conduits generally have a liquidity and/or credit facility to further enhance the credit quality of the commercial paper issuance. A single seller conduit will execute total return swaps, repurchase agreements, and liquidity and credit facilities with one financial institution. A multi-seller Conduit will execute total return swaps, repurchase agreements, and liquidity and credit facilities with numerous financial institutions. Refer to Notes 6 and 11 to the Consolidated Financial Statements for additional information on Conduits.
 
Our involvement with SPEs includes off-balance sheet arrangements discussed above, as well as the following activities:
 
  •  Holder of Issued Debt and Equity: Merrill Lynch invests in debt of third party securitization vehicles that are SPEs and also invests in SPEs that we establish. In Merrill Lynch formed SPEs, we may be the holder of debt and equity of an SPE. These holdings will be classified as trading assets, loans, notes and mortgages or investment securities. Such holdings may change over time at our discretion and rarely are there contractual obligations that require us to purchase additional debt or equity interests. Significant obligations are disclosed in the off-balance sheet arrangements table above.
 
  •  Warehousing of Loans and Securities: Warehouse loans and securities represent amounts maintained on our balance sheet that are intended to be sold into a trust for the purposes of securitization. We may retain these loans and securities on our balance sheet for the benefit of a


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  CDO managed by a third party. Warehoused loans are carried as held for sale and warehoused securities are carried as trading assets.
 
  •  Securitizations: In the normal course of business, we securitize: commercial and residential mortgage loans; municipal, government, and corporate bonds; and other types of financial assets. Securitizations involve the selling of assets to SPEs, which in turn issue debt and equity securities (“tranches”) with those assets as collateral. We may retain interests in the securitized financial assets through holding tranches of the securitization. See Note 6 to the Consolidated Financial Statements.
 
  •  Structured Investment Vehicles (“SIVs”): SIVs are leveraged investment programs that purchase securities and issue asset-backed commercial paper and medium-term notes. These SPEs are characterized by low equity levels with partial liquidity support facilities and the assets are actively managed by the SIV investment manager. We have not been the sponsor or equity investor of any SIV, though we have acted as a commercial paper or medium-term note placement agent for various SIVs.
 
Funding and Liquidity
 
Funding
 
We fund our assets primarily with a mix of secured and unsecured liabilities through a globally coordinated funding strategy. We fund a portion of our trading assets with secured liabilities, including repurchase agreements, securities loaned and other short-term secured borrowings, which are less sensitive to our credit ratings due to the underlying collateral. Refer to Note 9 to the Consolidated Financial Statements for additional information regarding our borrowings.
 
Credit Ratings
 
Our credit ratings affect the cost and availability of our unsecured funding, and it is our objective to maintain high quality credit ratings. In addition, credit ratings are important when we compete in certain markets and when we seek to engage in certain long-term transactions, including OTC derivatives. Following the acquisition by Bank of America, the major credit rating agencies have indicated that the primary drivers of Merrill Lynch’s credit ratings are Bank of America’s credit ratings. The rating agencies have also noted that Bank of America’s credit ratings currently reflect significant support from the U.S. government. In addition to Bank of America’s credit ratings, other factors that influence our credit ratings include rating agencies’ assessment of the general operating environment, our relative positions in the markets in which we compete, our reputation, our liquidity position, the level and volatility of our earnings, our corporate governance and risk management policies, and our capital management practices. Management maintains an active dialogue with the rating agencies.
 
The following table sets forth ML & Co.’s unsecured credit ratings as of February 20, 2009.
 
                     
 
    Senior
  Subordinated
  Preferred
  Commercial
   
    Debt
  Debt
  Stock
  Paper
  Rating
Rating Agency   Ratings   Ratings   Ratings   Ratings   Outlook
 
 
Dominion Bond Rating Service Ltd.
  A(high)   A   A(low)   R-1 (middle)   Under Review -
Negative
Fitch Ratings
  A+   A   BB   F1+   Stable
Moody’s Investors Service, Inc.
  A1   A2   Baa1   P-1   Negative
Rating & Investment Information, Inc. (Japan)
  A+   A   Not Rated   a-1   Rating Monitor with
Direction Uncertain
Standard & Poor’s Ratings Services
  A+   A   A-   A-1   Negative
 
 
 
In connection with certain OTC derivatives transactions and other trading agreements, we could be required to provide additional collateral to or terminate transactions with certain counterparties in the


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event of a downgrade of the senior debt ratings of ML & Co. The amount of additional collateral required depends on the contract and is usually a fixed incremental amount and/or the market value of the exposure. At December 26, 2008, the amount of additional collateral and termination payments that would be required for such derivatives transactions and trading agreements was approximately $1.6 billion in the event of a downgrade to mid single-A by all credit agencies. A further downgrade of ML & Co.’s long-term senior debt credit rating to the A- or equivalent level would require approximately an additional $232 million. Our liquidity risk analysis considers the impact of additional collateral outflows due to changes in ML & Co. credit ratings, as well as for collateral that is owed by us and is available for payment, but has not been called for by our counterparties.
 
Liquidity Risk
 
During 2008, the credit markets continued to experience significant deterioration, as spreads across the financial services sector widened dramatically, significantly increasing the cost and decreasing the availability of both secured and unsecured funding. Amidst these challenging conditions and in anticipation of our acquisition by Bank of America, Merrill Lynch continued to actively manage its liquidity position and reduce the size and risk of its balance sheet. Actions Merrill Lynch took in order to maintain significant excess liquidity included monetizing unencumbered assets through both sales and secured financing transactions, accessing U.S. and other government-sponsored liquidity facilities, and obtaining additional secured credit facilities from Bank of America.
 
Excess Liquidity and Unencumbered Assets
 
We maintained excess liquidity at ML & Co. and selected subsidiaries in the form of cash and high quality unencumbered liquid assets, which represents our “Global Liquidity Sources” and serves as our primary source of liquidity risk protection.
 
As of December 26, 2008 and December 28, 2007, the aggregate Global Liquidity Sources were $156 billion and $200 billion, respectively, consisting of the following:
 
                 
(dollars in billions)
 
    December 26,
  December 28,
    2008   2007
 
Excess liquidity pool
  $ 56     $ 79  
Unencumbered assets at bank subsidiaries
    58       57  
Unencumbered assets at non-bank subsidiaries
    42       64  
                 
Global Liquidity Sources
  $ 156     $ 200  
 
The excess liquidity pool is maintained at, or readily available to, ML & Co. and our principal non-U.S. broker-dealer and can be deployed to meet cash outflow obligations under stressed liquidity conditions. The excess liquidity pool includes cash and cash equivalents, investments in short-term money market mutual funds, U.S. government and agency obligations and other liquid securities. At December 26, 2008 and December 28, 2007, the total carrying value of the excess liquidity pool, net of related hedges, was $56 billion and $79 billion, respectively, which included liquidity sources at subsidiaries that we believe are available to ML & Co.
 
During the fourth quarter of 2008, our excess liquidity pool was reduced primarily from the repayment of maturing long-term debt and funding business requirements. Following the completion of the Bank of America acquisition, ML & Co. became a subsidiary of Bank of America and established intercompany lending and borrowing arrangements to facilitate centralized liquidity management. Included in these intercompany agreements is an initial $75 billion one year, revolving unsecured line of credit that allows ML & Co. to borrow funds from Bank of America for operating needs. Immediately following the acquisition, we placed a substantial portion of our excess liquidity with Bank of America through an intercompany lending agreement.


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At December 26, 2008 and December 28, 2007, unencumbered liquid assets of $58 billion and $57 billion, respectively, in the form of unencumbered investment grade asset-backed securities and prime residential mortgages were available at our regulated bank subsidiaries to meet potential deposit obligations, business activity demands and stressed liquidity needs of the bank subsidiaries. These unencumbered assets are generally restricted from transfer and unavailable as a liquidity source to ML & Co. and other non-bank subsidiaries.
 
At December 26, 2008 and December 28, 2007, our non-bank subsidiaries, including broker-dealer subsidiaries, maintained $42 billion and $64 billion, respectively, of unencumbered securities, including $7 billion of customer margin securities at December 26, 2008 and $10 billion at December 28, 2007. These unencumbered securities are an important source of liquidity for broker-dealer activities and other individual subsidiary financial commitments, and are generally restricted from transfer and therefore unavailable to support liquidity needs of ML & Co. or other subsidiaries. Proceeds from encumbering customer margin securities are further limited to supporting qualifying customer activities.
 
Committed Credit Facilities
 
In addition to the Global Liquidity Sources, we maintained external credit facilities that were available to cover regular and contingent funding needs. Following the Bank of America acquisition, certain sources of liquidity were centralized, and ML & Co. terminated all of its external committed credit facilities.
 
We maintained a committed, three-year multi-currency, unsecured bank credit facility that totaled $4.0 billion as of December 26, 2008. We borrowed regularly from this facility as an additional funding source to conduct normal business activities. At both December 26, 2008 and December 28, 2007, we had $1.0 billion of borrowings outstanding under this facility. Following the completion of the Bank of America acquisition, we repaid the outstanding borrowings and terminated the facility in January 2009.
 
We maintained a $2.7 billion committed, secured credit facility at December 26, 2008. There were no borrowings under the facility at December 26, 2008. Following the completion of the Bank of America acquisition, we terminated the facility in January 2009.
 
In December 2008 we decided not to seek a renewal of a $3.0 billion committed, secured credit facility. There were no borrowings under the facility at termination.
 
In October 2008, we entered into a $10.0 billion committed unsecured bank revolving credit facility with Bank of America, N.A. with borrowings guaranteed under the FDIC’s guarantee program. There were no borrowings under the facility at December 26, 2008. Following the completion of the Bank of America acquisition, the facility was terminated.
 
In September 2008, we established an additional $7.5 billion bilateral secured credit facility with Bank of America. There was $3.5 billion outstanding under this facility at year end. Following the completion of the Bank of America acquisition, we repaid the outstanding borrowings and the facility was terminated.
 
U.S. Government Liquidity Facilities
 
During 2008, the U.S. Government created several programs to enhance liquidity and provide stability to the financial markets. Merrill Lynch participated in a number of these programs throughout 2008.
 
In March 2008, the Federal Reserve announced an expansion of its securities lending program to promote liquidity in the financing markets for Treasury securities and other collateral. Under the Term Securities Lending Facility (“TSLF”), the Federal Reserve lends Treasury securities to primary dealers secured for a term of 28 days by a pledge of other securities, including U.S. Treasuries and Agencies and a range of investment grade corporate securities, municipal securities, mortgage-backed securities,


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and asset-backed securities. We regularly participate in the TSLF auctions, but generally reduced our usage during the fourth quarter.
 
Also in March 2008, the Federal Reserve announced that the Federal Reserve Bank of New York has been granted the authority to establish a Primary Dealer Credit Facility (“PDCF”). The PDCF provides overnight funding to primary dealers in exchange for collateral that may include U.S. Treasuries and Agencies and a broad range of debt and equity securities. Following the further credit market disruptions in September, we began utilizing the PDCF as an additional source of funding. We reduced our usage of the PDCF during the fourth quarter.
 
The Federal Reserve will operate the TSLF and PDCF through October 30, 2009 and may grant further extensions based on market conditions.
 
In October 2008, the Federal Reserve announced the creation of the Commercial Paper Funding Facility to provide a liquidity backstop to U.S. issuers of commercial paper. A special purpose vehicle will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers through October 30, 2009. Also in October 2008, the FDIC announced a new program, the Temporary Liquidity Guarantee Program, that would guarantee newly issued senior unsecured debt of banks, thrifts, and certain holding companies and provide full FDIC insurance coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. We are eligible for both the Commercial Paper Funding Facility and the Temporary Liquidity Guarantee Program and we began utilizing these programs in October 2008 as additional sources of funding.


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Item 7A.  Quantitative and Qualitative Disclosures About Market Risk
 
Risk Management Philosophy
 
In the course of conducting our business operations, we are exposed to a variety of risks including market, credit, liquidity, operational and other risks that are material and require comprehensive controls and ongoing oversight. These risks are monitored by our core business management as well as our independent risk groups.
 
Risk Management Process
 
Through 2008, Global Risk Management, Global Treasury and Operational Risk Management worked to ensure that risks were properly identified, measured, monitored, and managed throughout Merrill Lynch together with other independent control groups, including Corporate Audit, Finance and the Office of General Counsel. To accomplish this, we maintained a risk management process that included:
 
  •  A risk governance structure that defined the responsibilities of the independent groups that monitored risk and the oversight activities of the board committees, the Regulatory Oversight and Controls Committee and Weekly Risk Review;
 
  •  A regular review of the risk management process by the Audit Committee of the Board of Directors (the “Audit Committee”) as well as a regular review of credit, market and liquidity risks and processes by the Finance Committee of the Board of Directors (the “Finance Committee”);
 
  •  Clearly defined risk management policies and procedures;
 
  •  Communication and coordination among the businesses, executive management, and risk functions while maintaining strict segregation of responsibilities, controls, and oversight; and
 
  •  Clearly articulated risk tolerance levels, which were included within the framework established by Global Risk Management.
 
Risk Governance Structure
 
Through 2008, our risk governance structure was comprised of the Audit Committee and the Finance Committee of the Board, the Regulatory Oversight and Controls Committee, the business units, the independent risk and control groups, various other corporate governance committees and senior management. During 2008 the responsibilities that had been held by the former Risk Oversight Committee (the “ROC”) through 2007 were assumed by Global Risk Management, the newly established Regulatory Oversight and Controls Committee and the Weekly Risk Review. This structure was intended to provide effective management of risk by senior business managers and Global Risk Management jointly and clear accountability within the risk governance structure.
 
Board of Directors Committees
 
At the Board level, two committees were responsible for oversight of the management of the risks and risk policies and procedures of the firm. The Audit Committee, which was composed entirely of independent directors, oversaw management’s policies and processes for managing all major categories of risk affecting the firm, including operational, legal and reputational risks and management’s actions to assess and control such risks. The Finance Committee, which was also composed entirely of independent directors, reviewed the firm’s policies and procedures for managing exposure to market, credit and liquidity risk in general and, when appropriate, reviewed significant risk exposures and trends in these categories of risk. Both the Audit Committee and the Finance Committee were provided with regular risk updates from management and the independent control groups.


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Global Risk Management
 
Global Risk Management worked to establish our market and credit risk tolerance levels, which were represented in part by framework limits. Risk framework exceptions and violations were reported and investigated at predefined levels of management.
 
Regulatory Oversight and Controls Committee (“ROCC”) and Other Governance Committees
 
We established the ROCC in 2008 to oversee management procedures and controls related to risk, including the frameworks for managing market, credit, and operational risks, internal audit plans and information technology controls. The ROCC oversaw the activities of a number of additional existing governance committees, including new product, transaction review, and monitoring and oversight committees, that served to create policy, review activity, and verify that new and existing business initiatives remained within established risk tolerance levels. Representatives of the independent risk and control groups participated as members of these committees along with members from the businesses. The ROCC reported periodically to the Audit Committee of the Board.
 
Following the acquisition of Merrill Lynch by Bank of America, risk management and governance practices are being integrated with the goals of maintaining disciplined risk-taking throughout the transition and establishing best practices for the integrated firm going forward.
 
Market Risk
 
We define market risk as the potential change in value of financial instruments caused by fluctuations in interest rates, exchange rates, equity and commodity prices, credit spreads, and/or other risks.
 
Global Risk Management and other independent risk and control groups were responsible for approving the products and markets in which we transacted and took risk. Moreover, Global Risk Management was responsible for identifying the risks to which the firm’s business units were potentially exposed in these approved products and markets. Global Risk Management used a variety of quantitative methods to assess the risk of our positions and portfolios. In particular, Global Risk Management quantified the sensitivities of our current portfolios to changes in market variables. These sensitivities were then utilized in the context of historical data to estimate earnings and loss distributions that our current portfolios would have incurred throughout the historical period. From these distributions, a number of useful risk statistics were derived, including value at risk (“VaR”), which were used to measure and monitor market risk exposures in trading portfolios.
 
VaR is a statistical indicator of the potential losses in fair value of a portfolio due to adverse movements in underlying risk factors. The Merrill Lynch Risk Framework was designed to define and communicate our market risk tolerance and broad overall limits across the firm by defining and constraining exposure to specific asset classes, market risk factors and VaR.
 
The Trading VaR disclosed in the accompanying tables (which excludes U.S. ABS CDO net exposures) is a measure of risk based on a degree of confidence that the current portfolio could lose at least a certain dollar amount, over a given period of time. To calculate VaR, we aggregate sensitivities to market risk factors and combine them with a database of historical market factor movements to simulate a series of profits and losses. The level of loss that is exceeded in that series 5% of the time (i.e., one day in 20) is used as the estimate for the 95% confidence level VaR. The overall VaR amounts are presented across major risk categories, which include exposure to volatility risk found in certain products, such as options.
 
The calculation of VaR requires numerous assumptions and thus VaR should not be viewed as a precise measure of risk. Rather, it should be evaluated in the context of known limitations. These limitations include, but are not limited to, the following:
 
•  VaR measures do not convey the magnitude of extreme events;


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•  Historical data that forms the basis of VaR may fail to predict current and future market volatility; and
 
•  VaR does not reflect the effects of market illiquidity (i.e., the inability to sell or hedge a position over a relatively long period).
 
To complement VaR and in recognition of its inherent limitations, we used a number of additional risk measurement methods and tools as part of our overall market risk management process. These included stress testing and event risk analysis, which examine portfolio behavior under significant adverse market conditions, including scenarios that may result in material losses for Merrill Lynch. As a result of the unprecedented credit market environment during 2007 and 2008, in particular the extreme dislocation that affected U.S. sub-prime residential mortgage-related and ABS CDO positions, VaR, stress testing and other risk measures significantly underestimated the magnitude of actual loss. We continued to engage in the development of additional risk measurement methods; however, we also recognized the value of continuous re-evaluation of our approaches to risk management based on experience and judgment.
 
Trading Value at Risk
 
The tables that follow present our average and ending VaR for trading instruments for 2008 and 2007. Additionally, high and low VaR for 2008 is presented independently for each risk category and overall.
 
The aggregate VaR for our trading portfolios is less than the sum of the VaRs for individual risk categories because movements in different risk categories occur at different times and, historically, extreme movements have not occurred in all risk categories simultaneously. Thus, the difference between the sum of the VaRs for individual risk categories and the VaR calculated for all risk categories is shown in the following table and may be viewed as a measure of the diversification within our portfolios. Because high and low VaR numbers for these risk categories may have occurred on different days, high and low numbers for diversification benefit would not be meaningful.
 
Through the third quarter of 2008, the VaR metric which we reported was a “general market risk model,” so called because it captured general movements in broad market indices. As noted in prior disclosure, we continued to make enhancements to the VaR model to better reflect the risks of the portfolio for purposes of internal risk management and calculation of regulatory capital ratios. In particular, we implemented a supplemental VaR model designed to capture issuer-specific risks in credit and equity instruments and to better reflect the most recent market conditions related to the spreads on credit instruments. Table 1 below provides our General Market Risk VaR to facilitate comparison with the prior year. Table 2 below provides our Enhanced VaR model including Issuer Specific Risk (the “Specific Risk VaR”) for 2008.
 
Table 1 — Trading Value at Risk — 95% One-day General Market Risk VaR
 
                                                 
(dollars in millions)
 
        Daily
              Daily
    Year-End
  Average
  High
  Low
  Year-End
  Average
    2008   2008   2008   2008   2007   2007
 
Trading Value-at-Risk(1)
                                               
Interest rate and credit spread
  $ 36     $ 49     $ 92     $ 28     $ 52     $ 52  
Equity
    9       17       28       7       26       28  
Commodity
    16       19       36       10       15       18  
Currency
    7       6       15       -       5       5  
                                                 
Subtotal(2)
    68       91                       98       103  
Diversification benefit
    (27 )     (40 )                     (33 )     (38 )
                                                 
Overall
  $ 41     $ 51     $ 90     $ 30     $ 65     $ 65  
 
 
 
(1) Based on a 95% confidence level and a one-day holding period.
(2) Subtotals are not provided for highs and lows as they are not meaningful.


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General Market Risk VaR was lower at the end of 2008 as compared with 2007 primarily due to positioning and hedging in credit and equity markets and as a result of sales and markdowns in certain credit instruments. The reduction in General Market Risk VaR was partially offset by an increase in market volatility and correlations. Daily average General Market Risk VaR for 2008 was lower than that of 2007 due primarily to reductions in credit and equity exposures.
 
Table 2 — Trading Value at Risk — 95% One-day Specific Risk VaR
 
                                         
(dollars in millions)
 
        Daily
           
    Year-end
  Average
  High
  Low
  Year-end
    2008   2008   2008   2008   2007
 
Trading value-at-risk(1)
                                       
Interest rate and credit spread
  $ 100     $ 73     $ 114     $ 54     $ 69  
Equity
    21       25       48       16       38  
Commodity
    16       19       36       10       15  
Currency
    7       6       15       -       5  
                                         
Subtotal(2)
    144       123                       127  
Diversification benefit
    (44 )     (49 )                     (46 )
                                         
Overall
  $ 100     $ 74     $ 112     $ 52     $ 81  
 
 
 
(1) Based on a 95% confidence level and a one-day holding period.
(2) Subtotals are not provided for highs and lows as they are not meaningful.
 
Specific Risk VaR was higher at the end of 2008 as compared with 2007, driven primarily by an increase in credit markets volatility and the general level of credit spreads to which the Specific Risk VaR model is more sensitive than the General Market Risk VaR model. The 2007 Average Specific Risk VaR is not available as the model was implemented in 2008.
 
Non-Trading Market Risk
 
Non-trading market risk includes the risks associated with certain non-trading activities, including investment securities, securities financing transactions and certain equity and principal investments. Interest rate risks related to funding activities are also included; however, potential gains and losses due to changes in credit spreads on the firm’s own funding instruments are excluded. Risks related to lending activities are covered separately in the Counterparty Credit Risk section below.
 
The primary market risk of non-trading investment securities and repurchase and reverse repurchase agreements is expressed as sensitivity to changes in the general level of credit spreads, which are defined as the differences in the yields on debt instruments from relevant LIBOR/Swap rates. Non-trading investment securities include securities that are classified as available-for-sale and held-to-maturity. At December 26, 2008, the total credit spread sensitivity of these instruments was a pre-tax loss of $16 million in economic value for an increase of one basis point, which is one one-hundredth of a percent, in credit spreads, compared with $24 million at December 28, 2007. This change in economic value is a measurement of economic risk which may differ significantly in magnitude and timing from the actual profit or loss that would be realized under generally accepted accounting principles.
 
The interest rate risk associated with the non-trading positions, together with funding activities, is expressed as sensitivity to changes in the general level of interest rates. Our funding activities include LYONs®, trust preferred securities and other long-term debt issuances together with interest rate hedges. At December 26, 2008 the net interest rate sensitivity of these positions was a pre-tax gain in economic value of less than $1 million for a parallel one basis point increase in interest rates across all yield curves, compared to a pre-tax loss of $1 million at December 28, 2007. This change in economic value is a measurement of economic risk which may differ significantly in magnitude and timing from the actual profit or loss that would be realized under generally accepted accounting principles.


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Other non-trading equity investments include direct private equity interests, private equity fund investments, hedge fund interests, certain direct and indirect real estate investments and other principal investments. These investments are broadly sensitive to general price levels in the equity or commercial real estate markets as well as to specific business, financial and credit factors which influence the performance and valuation of each investment uniquely. Refer to Note 5 to the Consolidated Financial Statements for additional information on these investments.
 
Counterparty Credit Risk
 
We define counterparty credit risk as the potential for loss that can occur as a result of an individual, counterparty, or issuer being unable or unwilling to honor its contractual obligations to us. At Merrill Lynch the Credit Risk Framework was the primary tool used to communicate firm-wide credit limits and monitor exposure by constraining the magnitude and tenor of exposure to counterparty and issuer families.
 
Additionally, we deployed country risk limits to constrain total aggregate exposure across all counterparties and issuers (including sovereign entities) for a given country within predefined tolerance levels. Global Risk Management’s role was to assess the creditworthiness of existing and potential individual clients, institutional counterparties and issuers, and determine firm-wide credit risk levels within the Credit Risk Framework among other tools. This group was responsible for reviewing and monitoring specific transactions as well as portfolio and other credit risk concentrations both within and across businesses. This group was also responsible for ongoing monitoring of credit quality and limit compliance and worked actively with all of our business units to manage and mitigate credit risk.
 
Global Risk Management used a variety of methodologies to set limits on exposure and potential loss resulting from an individual, counterparty or issuer failing to fulfill its contractual obligations. To determine tolerance levels, the group performed analyses in the context of industrial, regional, and global economic trends and incorporated portfolio and concentration considerations. Credit risk limits were designed to take into account measures of both current and potential exposure as well as potential loss and were set and monitored by broad risk type, product type, and maturity. Credit risk mitigation techniques would include, where appropriate, the right to require initial collateral or margin, the right to terminate transactions or to obtain collateral should unfavorable events occur, the right to call for collateral when certain exposure thresholds are exceeded, the right to call for third party guarantees and the purchase of credit default protection. With senior management involvement, Global Risk Management conducted regular portfolio reviews, monitored counterparty creditworthiness, and evaluated potential transaction risks with a view toward early problem identification and protection against unacceptable credit-related losses.
 
Senior members of Global Risk Management chaired various commitment committees with membership across business, control and support units. These committees reviewed and approved commitments, underwritings and syndication strategies related to debt, syndicated loans, equity, real estate and asset-based finance, among other products and activities.
 
Following the acquisition of Merrill Lynch by Bank of America, risk management and governance practices are being integrated with the goals of maintaining disciplined risk-taking throughout the transition and establishing the best practices for the integrated firm going forward.
 
Derivatives
 
We enter into International Swaps and Derivatives Association, Inc. (“ISDA”) master agreements or their equivalent (“master netting agreements”) with almost all of our derivative counterparties. Master netting agreements provide protection in bankruptcy in certain circumstances and, in some cases, enable receivables and payables with the same counterparty to be offset for risk management purposes. Agreements are negotiated bilaterally and can require complex terms. While we make reasonable efforts to execute such agreements, it is possible that a counterparty may be unwilling to sign such an agreement and, as a result, would subject us to additional credit risk. The enforceability of master


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netting agreements under bankruptcy laws in certain countries or in certain industries is not free from doubt, and receivables and payables with counterparties in these countries or industries are accordingly recorded on a gross basis.
 
In addition, to reduce the risk of loss, we require collateral, principally cash and U.S. Government and agency securities, on certain derivative transactions. From an economic standpoint, we evaluate risk exposures net of related collateral that meets specified standards.
 
The following is a summary of counterparty credit ratings for the fair value (net of $52.5 billion of collateral, of which $50.2 billion represented cash collateral) of OTC trading derivative assets by maturity at December 26, 2008.
 
                                                 
(dollars in millions)
    Years to Maturity   Maturity
   
Credit Rating(1)   0 to 3   3+ to 5   5+ to 7   Over 7   Netting(2)   Total
 
AA or above
  $ 7,773     $ 3,537     $ 3,654     $ 18,905     $ (10,916 )   $ 22,953  
A
    9,719       2,589       2,260       6,998       (6,662 )     14,904  
BBB
    4,873       2,094       942       14,424       (2,216 )     20,117  
BB
    2,291       1,040       512       2,248       (259 )     5,832  
B or below
    3,210       1,782       689       4,753       (674 )     9,760  
Unrated
    1,918       188       25       566       (94 )     2,603  
                                                 
Total
  $ 29,784     $ 11,230     $ 8,082     $ 47,894     $ (20,821 )   $ 76,169  
 
 
 
(1) Represents credit rating agency equivalent of internal credit ratings.
(2) Represents netting of payable balances with receivable balances for the same counterparty across maturity band categories. Receivable and payable balances with the same counterparty in the same maturity category, however, are net within the maturity category.
 
In addition to obtaining collateral, we attempt to mitigate our default risk on derivatives whenever possible by entering into transactions with provisions that enable us to terminate or reset the terms of our derivative contracts.


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Item 8.   Financial Statements and Supplementary Data
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of Merrill Lynch & Co., Inc.:
 
We have audited the accompanying consolidated balance sheets of Merrill Lynch & Co., Inc. and subsidiaries (“Merrill Lynch”) as of December 26, 2008 and December 28, 2007, and the related consolidated statements of (loss)/earnings, changes in stockholders’ equity, comprehensive (loss)/income and cash flows for each of the three years in the period ended December 26, 2008. These financial statements are the responsibility of Merrill Lynch’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Merrill Lynch as of December 26, 2008 and December 28, 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 26, 2008, in conformity with accounting principles generally accepted in the United States of America.
 
As discussed in Notes 1 and 3 to the consolidated financial statements, in 2007 Merrill Lynch adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115,” and FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109.
 
As discussed in Note 1, Merrill Lynch became a wholly-owned subsidiary of Bank of America Corporation on January 1, 2009.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Merrill Lynch’s internal control over financial reporting as of December 26, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 23, 2009 expressed an adverse opinion on Merrill Lynch’s internal control over financial reporting because of material weaknesses.
 
/s/ Deloitte & Touche LLP
New York, New York
February 23, 2009


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Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of (Loss)/Earnings
 
                         
    Year Ended Last Friday in December
    2008
  2007
  2006
(dollars in millions, except per share amounts)
  (52 weeks)   (52 weeks)   (52 weeks)
 
Revenues
                       
Principal transactions
  $ (27,225 )   $ (12,067 )   $ 7,248  
Commissions
    6,895       7,284       5,985  
Managed accounts and other fee-based revenues
    5,544       5,465       6,273  
Investment banking
    3,733       5,582       4,648  
Earnings from equity method investments
    4,491       1,627       556  
Other
    (10,065 )     (2,190 )     2,883  
                         
Subtotal
    (16,627 )     5,701       27,593  
Interest and dividend revenues
    33,383       56,974       39,790  
Less interest expense
    29,349       51,425       35,571  
                         
Net interest profit
    4,034       5,549       4,219  
Gain on merger
    -       -       1,969  
                         
Revenues, net of interest expense
    (12,593 )     11,250       33,781  
                         
Non-interest expenses
                       
Compensation and benefits
    14,763       15,903       16,867  
Communications and technology
    2,201       2,057       1,838  
Brokerage, clearing, and exchange fees
    1,394       1,415       1,096  
Occupancy and related depreciation
    1,267       1,139       991  
Professional fees
    1,058       1,027       885  
Advertising and market development
    652       785       686  
Office supplies and postage
    215       233       225  
Other
    2,402       1,522       1,383  
Payment related to price reset on common stock offering
    2,500       -       -  
Goodwill impairment charge
    2,300       -       -  
Restructuring charge
    486       -       -  
                         
Total non-interest expenses
    29,238       24,081       23,971  
                         
Pre-tax (loss)/earnings from continuing operations
    (41,831 )     (12,831 )     9,810  
Income tax (benefit)/expense
    (14,280 )     (4,194 )     2,713  
                         
Net (loss)/earnings from continuing operations
    (27,551 )     (8,637 )     7,097  
                         
Discontinued operations:
                       
Pre-tax (loss)/earnings from discontinued operations
    (141 )     1,397       616  
Income tax (benefit)/expense
    (80 )     537       214  
                         
Net (loss)/earnings from discontinued operations
    (61 )     860       402  
                         
Net (loss)/earnings
  $ (27,612 )   $ (7,777 )   $ 7,499  
                         
Preferred stock dividends
    2,869       270       188  
                         
Net (loss)/earnings applicable to common stockholders
  $ (30,481 )   $ (8,047 )   $ 7,311  
                         
Basic (loss)/earnings per common share from continuing operations
  $ (24.82 )     (10.73 )     7.96  
Basic (loss)/earnings per common share from discontinued operations
    (0.05 )     1.04       0.46  
                         
Basic (loss)/earnings per common share
  $ (24.87 )   $ (9.69 )   $ 8.42  
                         
Diluted (loss)/earnings per common share from continuing operations
  $ (24.82 )     (10.73 )     7.17  
Diluted (loss)/earnings per common share from discontinued operations
    (0.05 )     1.04       0.42  
                         
Diluted (loss)/earnings per common share
  $ (24.87 )   $ (9.69 )   $ 7.59  
                         
Dividend paid per common share
  $ 1.40     $ 1.40     $ 1.00  
                         
Average shares used in computing (losses)/earnings per common share
                       
Basic
    1,225.6       830.4       868.1  
Diluted
    1,225.6       830.4       963.0  
 
 See Notes to Consolidated Financial Statements


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Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets
 
                 
    Dec. 26,
  Dec. 28,
(dollars in millions, except per share amounts)
  2008   2007
 
ASSETS
               
                 
Cash and cash equivalents
  $ 68,403     $ 41,346  
                 
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
    32,923       22,999  
                 
Securities financing transactions
               
Receivables under resale agreements (includes $62,146 in 2008 and $100,214 in 2007 measured at fair value in accordance with SFAS No. 159)
    93,247       221,617  
Receivables under securities borrowed transactions (includes $853 in 2008 measured at fair value in accordance with SFAS No. 159)
    35,077       133,140  
                 
      128,324       354,757  
                 
Trading assets, at fair value (includes securities pledged as collateral that can be sold or repledged of $18,663 in 2008 and $45,177 in 2007)
               
Derivative contracts
    89,477       72,689  
Corporate debt and preferred stock
    30,829       37,849  
Equities and convertible debentures
    26,160       60,681  
Mortgages, mortgage-backed, and asset-backed
    13,786       28,013  
Non-U.S. governments and agencies
    6,107       15,082  
U.S. Government and agencies
    5,253       11,219  
Municipals, money markets and physical commodities
    3,993       9,136  
                 
      175,605       234,669  
                 
Investment securities (includes $2,770 in 2008 and $4,685 in 2007 measured at fair value in accordance with SFAS No. 159) (includes securities pledged as collateral that can be sold or repledged of $2,557 in 2008 and $16,124 in 2007)
    57,007       82,532  
                 
Securities received as collateral, at fair value
    11,658       45,245  
                 
Other receivables
               
Customers (net of allowance for doubtful accounts of $143 in 2008 and $24 in 2007)
    51,131       70,719  
Brokers and dealers
    12,410       22,643  
Interest and other
    26,331       23,487  
                 
      89,872       116,849  
                 
                 
Loans, notes and mortgages (net of allowances for loan losses of $2,072 in 2008 and $533 in 2007) (includes $979 in 2008 and $1,149 in 2007 measured at fair value in accordance with SFAS No. 159)
    69,190       94,992  
                 
Equipment and facilities (net of accumulated depreciation and amortization of $5,856 in 2008 and $5,518 in 2007)
    2,928       3,127  
                 
Goodwill and other intangible assets
    2,616       5,091  
                 
Other assets
    29,017       18,443  
                 
                 
Total Assets
  $ 667,543     $ 1,020,050  
                 


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Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets
 
                 
    Dec. 26,
  Dec. 28,
(dollars in millions, except per share amounts)
  2008   2007
 
LIABILITIES
               
                 
Securities financing transactions
               
Payables under repurchase agreements (includes $32,910 in 2008 and $89,733 in 2007 measured at fair value in accordance with SFAS No. 159)
  $ 92,654     $ 235,725  
Payables under securities loaned transactions
    24,426       55,906  
                 
      117,080       291,631  
                 
Short-term borrowings (includes $3,387 in 2008 measured at fair value in accordance with SFAS No. 159)
    37,895       24,914  
                 
Deposits
    96,107       103,987  
                 
Trading liabilities, at fair value
               
Derivative contracts
    71,363       73,294  
Equities and convertible debentures
    7,871       29,652  
Non-U.S. governments and agencies
    4,345       9,407  
U.S. Government and agencies
    3,463       6,135  
Corporate debt and preferred stock
    1,318       4,549  
Municipals, money markets and other
    1,111       551  
                 
      89,471       123,588  
                 
                 
Obligation to return securities received as collateral, at fair value
    11,658       45,245  
                 
Other payables
               
Customers
    44,924       63,582  
Brokers and dealers
    12,553       24,499  
Interest and other
    32,918       44,545  
                 
      90,395       132,626  
                 
Long-term borrowings (includes $49,521 in 2008 and $76,334 in 2007 measured at fair value in accordance with SFAS No. 159)
    199,678       260,973  
                 
Junior subordinated notes (related to trust preferred securities)
    5,256       5,154  
                 
Total Liabilities
    647,540       988,118  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
STOCKHOLDERS’ EQUITY
               
                 
Preferred Stockholders’ Equity (liquidation preference of $30,000 per share;
               
issued: 2008 — 244,100 shares; 2007 — 155,000 shares; liquidation preference of $1,000 per share; issued: 2008 and 2007 — 115,000 shares; liquidation preference of $100,000 per share; issued: 2008 — 17,000 shares)
    8,605       4,383  
Common Stockholders’ Equity
               
Shares exchangeable into common stock
    -       39  
Common stock (par value $1.331/3 per share; authorized: 3,000,000,000 shares; issued: 2008 — 2,031,995,436 shares; 2007 — 1,354,309,819 shares)
    2,709       1,805  
Paid-in capital
    47,232       27,163  
Accumulated other comprehensive loss (net of tax)
    (6,318 )     (1,791 )
(Accumulated deficit) / retained earnings
    (8,603 )     23,737  
                 
      35,020       50,953  
                 
Less: Treasury stock, at cost (2008 — 431,742,565 shares; 2007 — 418,270,289 shares)
    23,622       23,404  
                 
Total Common Stockholders’ Equity
    11,398       27,549  
                 
                 
Total Stockholders’ Equity
    20,003       31,932  
                 
                 
Total Liabilities and Stockholders’ Equity
  $ 667,543     $ 1,020,050  
                 
 
 See Notes to Consolidated Financial Statements


54


Table of Contents

 
Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
 
                                                 
    Year Ended Last Friday in December
    Amounts   Shares
(dollars in millions)
  2008   2007   2006   2008   2007   2006
 
Preferred Stock, net
                                               
Balance, beginning of year
  $ 4,383     $ 3,145     $ 2,673       257,134       104,928       89,685  
Issuances
    10,814       1,615       374       172,100       165,000       12,000  
Redemptions
    (6,600 )     -       -       (66,000 )     -       -  
Shares (repurchased) re-issuances
    8       (377 )     98       211       (12,794 )     3,243  
                                                 
Balance, end of year
  $ 8,605     $ 4,383     $ 3,145       363,445       257,134       104,928  
                                                 
Common Stockholders’ Equity
                                               
Shares Exchangeable into Common Stock
                                               
Balance, beginning of year
  $ 39     $ 39     $ 41       2,552,982       2,659,926       2,707,797  
Exchanges
    (39 )     -       (2 )     (2,544,793 )     (106,944 )     (47,871 )
                                                 
Balance, end of year
    -       39       39       8,189       2,552,982       2,659,926  
                                                 
Common Stock
                                               
Balance, beginning of year
    1,805       1,620       1,531       1,354,309,819       1,215,381,006       1,148,714,008  
Capital issuance and acquisition(1)(2)
    648       122       -       486,166,666       91,576,096       -  
Preferred stock conversion
    236       -       -       177,322,917       -       -  
Shares issued to employees
    20       63       89       14,196,034       47,352,717       66,666,998  
                                                 
Balance, end of year
    2,709       1,805       1,620       2,031,995,436       1,354,309,819       1,215,381,006  
                                                 
Paid-in Capital
                                               
Balance, beginning of year
    27,163       18,919       13,320                          
Capital issuance and acquisition(1)(2)
    11,544       4,643       -                          
Preferred stock conversion
    6,970       -       -                          
Employee stock plan activity and other
    (553 )     1,962       2,351                          
Amortization of employee stock grants
    2,108       1,639       3,248                          
                                                 
Balance, end of year
    47,232       27,163       18,919                          
                                                 
Accumulated Other Comprehensive Loss:
                                               
Foreign Currency Translation Adjustment (net of tax)
                                               
Balance, beginning of year
    (441 )     (430 )     (507 )                        
Translation adjustment
    (304 )     (11 )     77                          
                                                 
Balance, end of year
    (745 )     (441 )     (430 )                        
                                                 
Net Unrealized Gains (Losses) on Investment Securities
                                               
Available-for-Sale (net of tax)
                                               
Balance, beginning of year
    (1,509 )     (192 )     (181 )                        
Net unrealized losses on available-for-sale securities
    (7,617 )     (2,460 )     (15 )                        
Adjustment to initially apply SFAS 159(3)
    -       172       -                          
Other adjustments(4)
    3,088       971       4                          
                                                 
Balance, end of year
    (6,038 )     (1,509 )     (192 )                        
                                                 
Deferred Gains (losses) on Cash Flow Hedges (net of tax)
                                               
Balance, beginning of year
    83       2       (3 )                        
Net deferred (losses) gains on cash flow hedges
    (2 )     81       5                          
                                                 
Balance, end of year
    81       83       2                          
                                                 
Defined benefit pension and postretirement plans (net of tax)
                                               
Balance, beginning of year
    76       (164 )     (153 )                        
Net gains
    306       240       -                          
Minimum pension liability adjustment
    -       -       (76 )                        
Adjustment to apply SFAS 158 change in measurement date(3)
    2       -       -                          
Adjustment to initially apply SFAS 158(3)
    -       -       65                          
                                                 
Balance, end of year
    384       76       (164 )                        
                                                 
Balance, end of year
    (6,318 )     (1,791 )     (784 )                        
                                                 
(Accumulated deficit) Retained Earnings
                                               
Balance, beginning of year
    23,737       33,217       26,824                          
Net (loss) earnings
    (27,612 )     (7,777 )     7,499                          
Preferred stock dividends declared
    (2,869 )     (270 )     (188 )                        
Common stock dividends declared
    (1,853 )     (1,235 )     (918 )                        
Adjustment to initially apply SFAS 157
    -       53       -                          
Adjustment to apply SFAS 158 change in measurement date
    (6 )     -       -                          
Adjustment to initially apply SFAS 159
    -       (185 )     -                          
Adjustment to initially apply FIN 48
    -       (66 )     -                          
                                                 
Balance, end of year
    (8,603 )     23,737       33,217                          
                                                 
Treasury Stock, at cost
                                               
Balance, beginning of year
    (23,404 )     (17,118 )     (7,945 )     (418,270,289 )     (350,697,271 )     (233,112,271 )
Shares repurchased
    -       (5,272 )     (9,088 )     -       (62,112,876 )     (116,610,876 )
Shares reacquired from employees and other(5)
    (363 )     (1,014 )     (89 )     (16,017,069 )     (5,567,086 )     (1,021,995 )
Share exchanges
    145       -       4       2,544,793       106,944       47,871  
                                                 
Balance, end of year
    (23,622 )     (23,404 )     (17,118 )     (431,742,565 )     (418,270,289 )     (350,697,271 )
                                                 
Total Common Stockholders’ Equity
  $ 11,398     $ 27,549     $ 35,893                          
                                                 
Total Stockholders’ Equity
  $ 20,003     $ 31,932     $ 39,038                          
                                                 
(1) The 2008 activity relates to the July 28, 2008 public offering and additional shares issued to Davis Selected Advisors and Temasek Holdings.
(2) The 2007 activity relates to the acquisition of First Republic Bank and to additional shares issued to Davis Selected Advisors and Temasek Holdings.
(3) This adjustment is not reflected on the Statement of Comprehensive (Loss)/Income.
(4) Other adjustments primarily relate to income taxes, policyholder liabilities and deferred policy acquisition costs.
(5) Share amounts are net of reacquisitions from employees of 19,057,068, 12,490,283 shares and 6,622,887 shares, in 2008, 2007 and 2006, respectively.
 See Notes to Consolidated Financial Statements


55


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Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Comprehensive (Loss)/Income
 
                         
    Year Ended Last Friday in December
(dollars in millions)
  2008   2007   2006
 
Net (Loss)/Earnings
  $ (27,612 )   $ (7,777 )   $ 7,499  
Other Comprehensive (Loss) Income
                       
Foreign currency translation adjustment:
                       
Foreign currency translation gains (losses)
    694       (282 )     (366 )
Income tax (expense) benefit
    (998 )     271       443  
                         
Total
    (304 )     (11 )     77  
                         
Net unrealized gains (losses) on investment securities available-for-sale:
                       
Net unrealized losses arising during the period
    (11,916 )     (2,291 )     (16 )
Reclassification adjustment for realized losses/(gains) included in net (loss)/earnings
    4,299       (169 )     1  
                         
Net unrealized losses on investment securities available-for-sale
    (7,617 )     (2,460 )     (15 )
                         
Adjustments for:
                       
Policyholder liabilities
    -       4       1  
Income tax benefit
    3,088       967       3  
                         
Total
    (4,529 )     (1,489 )     (11 )
                         
Deferred gains (losses) on cash flow hedges:
                       
Deferred gains (losses) on cash flow hedges
    240       162       9  
Reclassification adjustment for realized losses (gains) included in net earnings
    (241 )     (30 )     (2 )
Income tax (expense) benefit
    (1 )     (51 )     (2 )
                         
Total
    (2 )     81       5  
                         
Defined benefit pension and postretirement plans:
                       
Minimum pension liability adjustment
    -       -       (110 )
Net actuarial gains
    489       353          
Prior service cost
    (4 )     6          
Reclassification adjustment for realized losses included in
                       
net (loss)/earnings
    (5 )     23       -  
Income tax (expense) benefit
    (174 )     (142 )     34  
                         
Total
    306       240       (76 )
                         
Total Other Comprehensive Loss
    (4,529 )     (1,179 )     (5 )
                         
Comprehensive (Loss)/Income
  $ (32,141 )   $ (8,956 )   $ 7,494  
                         
 
 See Notes to Consolidated Financial Statements


56


Table of Contents

 
Merrill Lynch & Co., Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
 
                         
    Year Ended Last Friday in December
(dollars in millions)
  2008   2007   2006
 
Cash flows from operating activities:
                       
Net (loss)/earnings
  $ (27,612 )   $ (7,777 )   $ 7,499  
Adjustments to reconcile net (loss)/earnings to cash provided by (used for) operating activities
                       
Gain on merger
    -       -       (1,969 )
Gain on sale of MLIG
    -       (316 )     -  
Depreciation and amortization
    886       901       523  
Share-based compensation expense
    2,044       1,795       3,156  
Payment related to price reset on common stock offering
    2,500       -       -  
Goodwill impairment charge
    2,300       -       -  
Deferred taxes
    (16,086 )     (4,924 )     (360 )
Gain on sale of Bloomberg L.P. interest
    (4,296 )     -       -  
Loss (earnings) from equity method investments
    306       (1,409 )     (421 )
Other
    13,556       160       1,045  
Changes in operating assets and liabilities:
                       
Trading assets
    59,064       (29,650 )     (55,392 )
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
    (6,214 )     (8,886 )     (1,019 )
Receivables under resale agreements
    128,370       (43,247 )     (15,346 )
Receivables under securities borrowed transactions
    98,063       (14,530 )     (26,126 )
Customer receivables
    19,561       (21,280 )     (9,562 )
Brokers and dealers receivables
    10,236       (3,744 )     (6,825 )
Proceeds from loans, notes, and mortgages held for sale
    21,962       72,054       41,317  
Other changes in loans, notes, and mortgages held for sale
    2,700       (86,894 )     (47,670 )
Trading liabilities
    (34,338 )     23,878       9,554  
Payables under repurchase agreements
    (143,071 )     13,101       29,557  
Payables under securities loaned transactions
    (31,480 )     12,414       24,157  
Customer payables
    (18,658 )     14,135       13,795  
Brokers and dealers payables
    (11,946 )     113       4,791  
Trading investment securities
    3,216       9,333       (867 )
Other, net
    (31,588 )     2,411       6,400  
                         
Cash provided by (used for) operating activities
    39,475       (72,362 )     (23,763 )
                         
Cash flows from investing activities:
                       
Proceeds from (payments for):
                       
Maturities of available-for-sale securities
    7,250       13,362       13,222  
Sales of available-for-sale securities
    29,537       39,327       16,176  
Purchases of available-for-sale securities
    (31,017 )     (58,325 )     (31,357 )
Proceeds from the sale of discontinued operations
    12,576       1,250       -  
Equipment and facilities, net
    (630 )     (719 )     (1,174 )
Loans, notes, and mortgages held for investment
    (13,379 )     5,113       (681 )
Other investments
    1,336       (5,049 )     (6,543 )
Transfer of cash balances related to merger
    -       -       (651 )
Acquisitions, net of cash
    -       (2,045 )     -  
                         
Cash provided by (used for) investing activities
    5,673       (7,086 )     (11,008 )
                         
Cash flows from financing activities:
                       
Proceeds from (payments for):
                       
Commercial paper and short-term borrowings
    12,981       6,316       9,123  
Issuance and resale of long-term borrowings
    70,194       165,107       87,814  
Settlement and repurchases of long-term borrowings
    (109,731 )     (93,258 )     (42,545 )
Deposits
    (7,880 )     9,884       4,108  
Derivative financing transactions
    543       848       608  
Issuance of common stock
    9,899       4,787       1,838  
Issuance of preferred stock, net
    9,281       1,123       472  
Common stock repurchases
    -       (5,272 )     (9,088 )
Other common stock transactions
    (833 )     (60 )     539  
Excess tax benefits related to share-based compensation
    39       715       531  
Dividends
    (2,584 )     (1,505 )     (1,106 )
                         
Cash (used for) provided by financing activities
    (18,091 )     88,685       52,294  
                         
Increase in cash and cash equivalents
    27,057       9,237       17,523  
Cash and cash equivalents, beginning of period
    41,346       32,109       14,586  
                         
Cash and cash equivalents, end of period
  $ 68,403     $ 41,346     $ 32,109  
                         
Supplemental Disclosure of Cash Flow Information:
                       
Income taxes paid
  $ 1,518     $ 1,846     $ 2,638  
Interest paid
    30,397       49,881       35,685  
 
Non-cash investing and financing activities :
 
As a result of the conversion of $6.6 billion of Merrill Lynch’s mandatory convertible preferred stock, series 1, the Company recorded additional preferred dividends of $2.1 billion in 2008. The preferred dividends were paid in additional shares of common and preferred stock.
 
In satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek, Merrill Lynch agreed to pay Temasek $2.5 billion, all of which was paid through the issuance of common stock.
 
As a result of the completed sale of Merrill Lynch’s 20% ownership stake in Bloomberg, L.P., Merrill Lynch recorded a $4.3 billion pre-tax gain. In connection with this sale, Merrill Lynch received notes totaling approximately $4.3 billion that have been recorded as held-to-maturity investment securities on the Consolidated Balance Sheets.
 See Notes to Consolidated Financial Statements


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Merrill Lynch & Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 26, 2008
 
 
Description of Business
 
Merrill Lynch & Co., Inc. (“ML & Co.”) and together with its subsidiaries, (“Merrill Lynch” or the “Company”) provide investment, financing, insurance, and related services to individuals and institutions on a global basis through its broker, dealer, banking, and other financial services subsidiaries. Its principal subsidiaries include:
 
  •  Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a U.S.-based broker-dealer in securities and futures commission merchant;
  •  Merrill Lynch International (“MLI”), a U.K.-based broker-dealer in securities and dealer in equity and credit derivatives;
  •  Merrill Lynch Government Securities Inc. (“MLGSI”), a U.S.-based dealer in U.S. Government securities;
  •  Merrill Lynch Capital Services, Inc., a U.S.-based dealer in interest rate, currency, credit derivatives and commodities;
  •  Merrill Lynch Bank USA (“MLBUSA”), a U.S.-based, state chartered, Federal Deposit Insurance Corporation (“FDIC”)-insured depository institution;
  •  Merrill Lynch Bank & Trust Co., FSB (“MLBT-FSB”), a U.S.-based, federally chartered, FDIC-insured depository institution;
  •  Merrill Lynch International Bank Limited (“MLIB”), an Ireland-based bank;
  •  Merrill Lynch Mortgage Capital, Inc., a U.S.-based dealer in syndicated commercial loans;
  •  Merrill Lynch Japan Securities Co., Ltd. (“MLJS”), a Japan-based broker-dealer;
  •  Merrill Lynch Derivative Products, AG, a Switzerland-based derivatives dealer; and
  •  ML IBK Positions Inc., a U.S.-based entity involved in private equity and principal investing.
 
Services provided to clients by Merrill Lynch and other activities include:
 
  •  Securities brokerage, trading and underwriting;
  •  Investment banking, strategic advisory services (including mergers and acquisitions) and other corporate finance activities;
  •  Wealth management products and services, including financial, retirement and generational planning;
  •  Investment management and advisory and related record-keeping services;
  •  Origination, brokerage, dealer, and related activities in swaps, options, forwards, exchange-traded futures, other derivatives, commodities and foreign exchange products;
  •  Securities clearance, settlement financing services and prime brokerage;
  •  Private equity and other principal investing activities;
  •  Proprietary trading of securities, derivatives and loans;
  •  Banking, trust, and lending services, including deposit-taking, consumer and commercial lending, including mortgage loans, and related services;
  •  Insurance and annuities sales; and
  •  Research services on a global basis
 
Bank of America Acquisition
 
On January 1, 2009, Merrill Lynch was acquired by Bank of America Corporation (“Bank of America”) through the merger of a wholly owned subsidiary of Bank of America with and into ML & Co. with ML & Co. continuing as the surviving corporation and a wholly owned subsidiary of Bank of America. Upon completion of the acquisition, each outstanding share of ML & Co. common stock was


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converted into 0.8595 shares of Bank of America common stock. As of the completion of the acquisition, ML & Co. Series 1 through Series 8 preferred stock were converted into Bank of America preferred stock with substantially identical terms of the corresponding series of Merrill Lynch preferred stock (except for additional voting rights provided to the Bank of America securities). The Merrill Lynch 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 2, and 9.00% Non-Voting Mandatory Convertible Non-Cumulative Preferred Stock, Series 3 that was outstanding immediately prior to the completion of the acquisition remained issued and outstanding subsequent to the acquisition, but are now convertible into Bank of America common stock.
 
Basis of Presentation
 
The Consolidated Financial Statements include the accounts of ML & Co. and subsidiaries (collectively, “Merrill Lynch”). The Consolidated Financial Statements are presented in accordance with U.S. Generally Accepted Accounting Principles, which include industry practices. Intercompany transactions and balances have been eliminated. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.
 
The Consolidated Financial Statements are presented in U.S. dollars. Many non-U.S. subsidiaries have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar, often the currency of the country in which a subsidiary is domiciled. Subsidiaries’ assets and liabilities are translated to U.S. dollars at year-end exchange rates, while revenues and expenses are translated at average exchange rates during the year. Adjustments that result from translating amounts in a subsidiary’s functional currency and related hedging, net of related tax effects, are reported in stockholders’ equity as a component of accumulated other comprehensive loss. All other translation adjustments are included in earnings. Merrill Lynch uses derivatives to manage the currency exposure arising from activities in non-U.S. subsidiaries. See the Derivatives section for additional information on accounting for derivatives.
 
Merrill Lynch offers a broad array of products and services to its diverse client base of individuals, small to mid-size businesses, employee benefit plans, corporations, financial institutions, and governments around the world. These products and services are offered from a number of locations globally. In some cases, the same or similar products and services may be offered to both individual and institutional clients, utilizing the same infrastructure. In other cases, a single infrastructure may be used to support multiple products and services offered to clients. When Merrill Lynch analyzes its profitability, it does not focus on the profitability of a single product or service. Instead, Merrill Lynch views the profitability of businesses offering an array of products and services to various types of clients. The profitability of the products and services offered to individuals, small to mid-size businesses, and employee benefit plans is analyzed separately from the profitability of products and services offered to corporations, financial institutions, and governments, regardless of whether there is commonality in products and services infrastructure. As such, Merrill Lynch does not separately disclose the costs associated with the products and services sold or general and administrative costs either in total or by product.
 
When determining the prices for products and services, Merrill Lynch considers multiple factors, including prices being offered in the market for similar products and services, the competitiveness of its pricing compared to competitors, the profitability of its businesses and its overall profitability, as well as the profitability, creditworthiness, and importance of the overall client relationships.
 
Shared expenses that are incurred to support products and services and infrastructures are allocated to the businesses based on various methodologies, which may include headcount, square footage, and certain other criteria. Similarly, certain revenues may be shared based upon agreed methodologies. When looking at the profitability of various businesses, Merrill Lynch considers all expenses incurred, including overhead and the costs of shared services, as all are considered integral to the operation of the businesses.


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Discontinued Operations
 
On August 13, 2007, Merrill Lynch announced a strategic business relationship with AEGON, N.V. (“AEGON”) in the areas of insurance and investment products. As part of this relationship, Merrill Lynch sold Merrill Lynch Life Insurance Company and ML Life Insurance Company of New York (together “Merrill Lynch Insurance Group” or “MLIG”) to AEGON for $1.3 billion in the fourth quarter of 2007, which resulted in an after-tax gain of approximately $316 million. The gain along with the financial results of MLIG, have been reported within discontinued operations for all periods presented. Merrill Lynch previously reported the results of MLIG in the Global Wealth Management (“GWM”) business segment. Refer to Note 16 for additional information.
 
On December 24, 2007 Merrill Lynch announced that it had reached an agreement with GE Capital to sell Merrill Lynch Capital, a wholly-owned middle-market commercial finance business. The sale included substantially all of Merrill Lynch Capital’s operations, including its commercial real estate division. This transaction closed on February 4, 2008. Merrill Lynch has included results of Merrill Lynch Capital within discontinued operations for all periods presented. Merrill Lynch previously reported results of Merrill Lynch Capital in the Global Markets and Investment Banking (“GMI”) business segment. Refer to Note 16 for additional information.
 
Consolidation Accounting Policies
 
The Consolidated Financial Statements include the accounts of Merrill Lynch, whose subsidiaries are generally controlled through a majority voting interest. In certain cases, Merrill Lynch subsidiaries may also be consolidated based on a risks and rewards approach. Merrill Lynch does not consolidate those special purpose entities that meet the criteria of a qualified special purpose entity (“QSPE”).
 
Merrill Lynch determines whether it is required to consolidate an entity by first evaluating whether the entity qualifies as a voting rights entity (“VRE”), a variable interest entity (“VIE”), or a QSPE.
 
VREs are defined to include entities that have both equity at risk that is sufficient to fund future operations and have equity investors with decision making ability that absorb the majority of the expected losses and expected returns of the entity. In accordance with SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries, Merrill Lynch generally consolidates those VREs where it holds a controlling financial interest. For investments in limited partnerships and certain limited liability corporations that Merrill Lynch does not control, Merrill Lynch applies Emerging Issues Task Force (“EITF”) Topic D-46, Accounting for Limited Partnership Investments, 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% of the outstanding equity in the entity. For more traditional corporate structures, in accordance with Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, Merrill Lynch applies the equity method of accounting where it has significant influence over 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.
 
VIEs — Those entities that do not meet the VRE criteria are generally analyzed for consolidation as either VIEs or QSPEs. Merrill Lynch consolidates those VIEs in which it absorbs the majority of the variability in expected losses and/or the variability in expected returns of the entity as required by FIN 46(R), Consolidation of Variable Interest Entities (“FIN 46(R)”). Merrill Lynch relies on a qualitative and/or quantitative analysis, including an analysis of the design of the entity, to determine if it is the primary beneficiary of the VIE and therefore must consolidate the VIE. Merrill Lynch reassesses whether it is the primary beneficiary of a VIE upon the occurrence of a reconsideration event.
 
QSPEs — QSPEs are passive entities with significantly limited permitted activities. QSPEs are generally used as securitization vehicles and are limited in the type of assets they may hold, the derivatives into which they can enter and the level of discretion that they may exercise through


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servicing activities. In accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS No. 140”), and FIN 46(R), Merrill Lynch does not consolidate QSPEs.
 
Securitization Activities
 
In the normal course of business, Merrill Lynch securitizes 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 issuances of the securitization. In accordance with SFAS No. 140, where Merrill Lynch relinquishes control, it recognizes transfers of financial assets as sales to the extent of cash and any proceeds received. Control is considered to be relinquished when all of the following conditions have been met:
 
  •  The transferred assets have been legally isolated from the transferor even in bankruptcy or other receivership;
  •  The transferee has the right to pledge or exchange the assets it received, or if the entity is a QSPE, the beneficial interest holders have the right to pledge or exchange their beneficial interests; and
  •  The transferor does not maintain effective control over the transferred assets (e.g. the ability to unilaterally cause the holder to return specific transferred assets).
 
Revenue Recognition
 
Principal transactions revenues include 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 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 marketplace participants. Gains and losses 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 accounts 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. In addition, until the merger of the Merrill Lynch Investment Management (“MLIM”) business with BlackRock, Inc. (“BlackRock”) at the end of the third quarter of 2006 (the “BlackRock Merger”), managed accounts and other fee-based revenues also included fees earned from the management and administration of retail mutual funds and institutional funds, such as pension assets, and performance fees earned on certain separately managed accounts and institutional money management arrangements.
 
Investment banking revenues include underwriting revenues and fees for merger and acquisition advisory services, which are accrued when services for the transactions are substantially completed. Underwriting revenues are presented net of transaction-related expenses. Transaction-related expenses, primarily legal, travel and other costs directly associated with the transaction, are deferred and recognized in the same period as the related revenue from the investment banking transaction to match revenue recognition.
 
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. In addition, earnings from equity method investments for the year ended December 26, 2008 included a gain of $4.3 billion associated with the sale of Bloomberg, L.P. (see Note 5).


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Other revenues include gains/(losses) on investment securities, including sales and other-than-temporary-impairment losses associated with certain available-for-sale securities, gains/(losses) on private equity investments and gains/(losses) on loans and other miscellaneous items.
 
Contractual interest and dividends received and paid 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 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 with related interest recorded as interest revenue or interest expense, as applicable. Contractual interest, if any, on structured notes is recorded as a component of interest expense.
 
Use of Estimates
 
In presenting the Consolidated Financial Statements, management makes estimates regarding:
 
  •  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;
  •  Assumptions and cash flow projections used in determining whether VIEs should be consolidated and the determination of the qualifying status of QSPEs;
  •  The realization of deferred taxes and the recognition and measurement of uncertain tax positions;
  •  The carrying amount of goodwill and other 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 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 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 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 SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”), SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), and SFAS No. 159, Fair Value Option for Financial Assets and Liabilities (“SFAS No. 159”). Merrill Lynch also accounts for certain assets at fair value under applicable industry guidance, namely broker-dealer and investment company accounting guidance.
 
Merrill Lynch early adopted the provisions of SFAS No. 157, Fair Value Measurements (“SFAS No. 157”), in the first quarter of 2007. SFAS No. 157 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. SFAS No. 157 nullifies the guidance provided by EITF Issue No. 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities (“EITF 02-3”), which prohibited recognition of day one gains or losses on derivative transactions where model inputs that significantly impact valuation are not observable.


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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. Determining the fair value for 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 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.
 
Prior to adoption of SFAS No. 157, Merrill Lynch followed the provisions of EITF 02-3. Under EITF 02-3, recognition of day one gains and losses on derivative transactions where model inputs that significantly impact valuation are not observable were prohibited. Day one gains and losses deferred at inception under EITF 02-3 were recognized at the earlier of when the valuation of such derivatives became observable or at the termination of the contract. Although the guidance in EITF 02-3 has been nullified, 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 marked-to-market 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 SFAS No. 157. 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 this resultant value is incorporated into the fair value of the respective instruments. Merrill Lynch generally calculates the credit risk adjustment for derivatives on observable market credit spreads.
 
SFAS No. 157 also requires that Merrill Lynch consider its own creditworthiness when determining the fair value of an instrument, including OTC derivative instruments. The approach to measuring the


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impact of Merrill Lynch’s credit risk on an instrument is done in the same manner as for third party credit risk. The impact of Merrill Lynch’s credit risk is incorporated into the fair value, even when credit risk is not readily observable, of an instrument such as in OTC derivatives contracts. OTC derivative liabilities are valued based on the net counterparty exposure as described above.
 
Legal 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 outside counsel.
 
Income Taxes
 
Merrill Lynch provides for income taxes on all transactions that have been recognized in the Consolidated Financial Statements in accordance with SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”). 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 future 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 expected to be realized. Merrill Lynch assesses its ability to realize deferred tax assets based on past and projected earnings, tax carryforward periods, tax planning strategies and other factors of the legal entities through which the deferred tax assets will be realized as discussed in SFAS No. 109. Deferred tax assets of approximately $10.0 billion, which were previously classified as interest and other receivables at December 28, 2007, have been restated to other assets in the Consolidated Balance Sheets.
 
Merrill Lynch recognizes and measures its unrecognized tax benefits in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). Merrill Lynch estimates the likelihood, based on the technical merits, that tax positions will be sustained upon examination based on 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. The reassessment of unrecognized tax benefits could have a material impact on Merrill Lynch’s effective tax rate in the period in which it occurs.
 
ML & Co. and certain of its wholly-owned subsidiaries file a consolidated U.S. federal income tax return. Certain other Merrill Lynch entities file tax returns in their local jurisdictions. See Note 14 for a further discussion of income taxes.
 
Goodwill and Intangibles
 
Merrill Lynch makes certain complex judgments with respect to its goodwill and intangible assets. These include assumptions and estimates used to determine the fair value of its reporting units. Reporting unit fair value is determined using market-multiple and discounted cash flow analyses. Merrill Lynch also makes assumptions and estimates in valuing its intangible assets and determining the useful lives of its intangible assets with definite lives. Refer to Note 8 for further information.
 
Employee Stock Options
 
The fair value of stock options with vesting based solely on service requirements is estimated as of the grant date based on a Black-Scholes option pricing model. The fair value of stock options with vesting that is partially dependent on pre-determined increases in the price of Merrill Lynch’s common stock is estimated as of the grant date using a lattice option pricing model. These models take into account the


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exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends and the risk-free interest rate for the expected term of the option. Judgment is required in determining certain of the inputs to the model. The expected life of the option is based on an analysis of historical employee exercise behavior. The expected volatility is based on Merrill Lynch’s implied stock price volatility for the same number of months as the expected life of the option. The fair value of the option estimated at grant date is not adjusted for subsequent changes in assumptions.
 
Balance Sheet
 
Cash and Cash Equivalents
 
Merrill Lynch defines cash equivalents as short-term, highly liquid securities, federal funds sold, and interest-earning deposits with maturities, when purchased, of 90 days or less, that are not used for trading purposes. The amounts recognized for cash and cash equivalents in the Consolidated Balance Sheets approximate fair value.
 
Cash and Securities Segregated for Regulatory Purposes or Deposited with Clearing Organizations
 
Merrill Lynch maintains relationships with clients around the world and, as a result, it is subject to various regulatory regimes. As a result of its client activities, Merrill Lynch is obligated by rules mandated by its primary regulators, including the Securities and Exchange Commission (“SEC”) and the Commodities Futures Trading Commission (“CFTC”) in the United States and the Financial Services Authority (“FSA”) in the United Kingdom to segregate or set aside cash and/or qualified securities to satisfy these regulations, which have been promulgated to protect customer assets. In addition, Merrill Lynch is a member of various clearing organizations at which it maintains cash and/or securities required for the conduct of its day-to-day clearance activities. The amounts recognized for cash and securities segregated for regulatory purposes or deposited with clearing organizations in the Consolidated Balance Sheets approximate fair value.
 
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 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 SFAS No. 159. 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 has been elected, 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 3. 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 fully collateralized.
 
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 resale 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.
 
Substantially all repurchase and resale activities are transacted under master repurchase agreements that give Merrill Lynch the right, in the event of default, to liquidate collateral held and to offset


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receivables and payables with the same counterparty. Merrill Lynch offsets certain repurchase and resale agreement balances with the same counterparty on the Consolidated Balance Sheets.
 
Merrill Lynch may use securities received as collateral for resale agreements to satisfy regulatory requirements such as Rule 15c3-3 of the SEC.
 
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 in SFAS No. 159. 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. On a daily basis, Merrill Lynch monitors the market value of securities borrowed or loaned against the collateral value, and Merrill Lynch may require counterparties to deposit additional collateral or may return collateral pledged, when appropriate. The carrying value of these instruments approximates fair value as these items are not materially sensitive to shifts in market interest rates because of their short-term nature and/or their variable interest rates.
 
All firm-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, if applicable, in investment securities on the 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 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 amounts on the Consolidated Balance Sheets result from 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 used for trading purposes or for managing risk exposures in other trading inventory. See the Derivatives section of this Note for additional information on the accounting for derivatives. Trading assets and trading liabilities also include commodities inventory.
 
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 market 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). Derivative activity is subject to Merrill Lynch’s overall risk management policies and procedures.


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SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (“embedded derivatives”) and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the Consolidated Balance Sheets and measure those instruments at fair value. The fair value of derivatives is recorded on a net-by-counterparty basis on the Consolidated Balance Sheets where management believes a legal right of setoff exists under an enforceable netting agreement.
 
The accounting for changes in fair value of a derivative instrument depends on its intended use and if it is designated and qualifies as an accounting hedging instrument under SFAS No. 133.
 
Merrill Lynch enters into derivatives to facilitate client transactions, for proprietary trading and financing purposes, and to manage risk exposures arising from trading assets and liabilities. Derivatives entered into for these purposes are recognized at fair value on the Consolidated Balance Sheets as trading assets and liabilities, and changes in fair value are reported in current period earnings as principal transactions revenues.
 
Merrill Lynch also enters into derivatives in order to manage risk exposures arising from assets and liabilities not carried at fair value as follows:
 
1.  Merrill Lynch issued debt in a variety of maturities and currencies to achieve the lowest cost financing possible. In addition, Merrill Lynch’s regulated bank entities accept time deposits of varying rates and maturities. Merrill Lynch enters into derivative transactions to hedge these liabilities. Derivatives used most frequently include swap agreements that:
 
  •  Convert fixed-rate interest payments into variable-rate interest payments;
 
  •  Change the underlying interest rate basis or reset frequency; and
 
  •  Change the settlement currency of a debt instrument.
 
2.  Merrill Lynch entered into hedges on marketable investment securities to manage the interest rate risk, currency risk, and net duration of its investment portfolios. As of December 26, 2008 these hedges had been discontinued.
 
3.  Merrill Lynch has fair value hedges of long-term fixed rate resale and repurchase agreements to manage the interest rate risk of these assets and liabilities. Subsequent to the adoption of SFAS No. 159, Merrill Lynch elects to account for these instruments on a fair value basis rather than apply hedge accounting.
 
4.  Merrill Lynch uses foreign-exchange forward contracts, foreign-exchange options, currency swaps, and foreign-currency-denominated debt to hedge its net investments in foreign operations. These derivatives and cash instruments are used to mitigate the impact of changes in exchange rates.
 
5.  Merrill Lynch enters into futures, swaps, options and forward contracts to manage the price risk of certain commodity inventory.
 
Derivatives entered into by Merrill Lynch to hedge its funding, marketable investment securities and net investments in foreign subsidiaries are reported at fair value in other assets or interest and other payables on the Consolidated Balance Sheets. Derivatives used to hedge commodity inventory are included in trading assets and trading liabilities on the Consolidated Balance Sheets.
 
Derivatives that qualify as accounting hedges under the guidance in SFAS No. 133 are designated as one of the following:
 
1.  A hedge of the fair value of a recognized asset or liability (“fair value” hedge). Changes in the fair value of derivatives that are designated and qualify as fair value hedges of interest rate risk, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings as interest revenue or expense. Changes in the fair value of derivatives that are designated and qualify as fair value hedges of commodity price risk, along with


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the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings in principal transactions.
 
2.  A hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge). Changes in the fair value of derivatives that are designated and qualify as effective cash flow hedges are recorded in accumulated other comprehensive loss until earnings are affected by the variability of cash flows of the hedged asset or liability (e.g., when periodic interest accruals on a variable-rate asset or liability are recorded in earnings).
 
3.  A hedge of a net investment in a foreign operation. Changes in the fair value of derivatives that are designated and qualify as hedges of a net investment in a foreign operation are recorded in the foreign currency translation adjustment account within accumulated other comprehensive loss. Changes in the fair value of the hedging instruments that are associated with the difference between the spot translation rate and the forward translation rate are recorded in current period earnings in other revenues.
 
Merrill Lynch formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, Merrill Lynch discontinues hedge accounting. Under the provisions of SFAS No. 133, 100% hedge effectiveness is assumed for those derivatives whose terms meet the conditions of the SFAS No. 133 “short-cut method.”
 
As noted above, Merrill Lynch enters into fair value and cash flow hedges of interest rate exposure associated with certain investment securities and debt issuances. Merrill Lynch uses interest rate swaps to hedge this exposure. Hedge effectiveness testing is required for certain of these hedging relationships on a quarterly basis. For fair value hedges, Merrill Lynch assesses effectiveness on a prospective basis by comparing the expected change in the price of the hedge instrument to the expected change in the value of the hedged item under various interest rate shock scenarios. For cash flow hedges, Merrill Lynch assesses effectiveness on a prospective basis by comparing the present value of the projected cash flows on the variable leg of the hedge instrument against the present value of the projected cash flows of the hedged item (the “change in variable cash flows” method) under various interest rate, prepayment and credit shock scenarios. In addition, Merrill Lynch assesses effectiveness on a retrospective basis using the dollar-offset ratio approach. When assessing hedge effectiveness, there are no attributes of the derivatives used to hedge the fair value exposure that are excluded from the assessment. Ineffectiveness associated with these hedges was immaterial for all periods presented. As of December 26, 2008, Merrill Lynch had discontinued its cash flow hedges on marketable investment securities. The cash flows that had been hedged were still expected to occur, therefore, amounts remained in accumulated other comprehensive loss in the Consolidated Balance Sheets in relation to these hedges. Of the deferred net gains from cash flow hedges that were in accumulated other comprehensive loss on the Consolidated Balance Sheet at December 26, 2008, $31 million are expected to be reclassified into earnings during 2009.
 
Merrill Lynch also enters into fair value hedges of commodity price risk associated with certain commodity inventory. For these hedges, Merrill Lynch assesses effectiveness on a prospective and retrospective basis using regression techniques. The difference between the spot rate and the contracted forward rate which represents the time value of money is excluded from the assessment of hedge effectiveness and is recorded in principal transactions revenues. The amount of ineffectiveness related to these hedges reported in earnings was not material for all periods presented.
 
For hedges of net investments in foreign operations, gains of $1,649 million and losses of $432 million related to non-U.S. dollar hedges of investments in non-U.S. dollar subsidiaries were included in accumulated other comprehensive loss on the Consolidated Balance Sheets for the years ended 2008 and 2007, respectively. In 2008, hedging gains were substantially offset by net losses on translation of the foreign investments. Conversely, in 2007, the hedge losses were substantially offset by net gains on the translation of the foreign investments.


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Netting of Derivative Contracts
 
Where Merrill Lynch has entered into a legally enforceable netting agreement with counterparties, it reports derivative assets and liabilities, and any related cash collateral, net in the Consolidated Balance Sheets in accordance with FIN No. 39, Offsetting Amounts Related to Certain Contracts (“FIN No. 39”). Derivative assets and liabilities are presented net of cash collateral of approximately $50.2 billion and $65.5 billion, respectively, at December 26, 2008 and $13.5 billion and $39.7 billion, respectively, at December 28, 2007.
 
Derivatives that Contain a Significant Financing Element
 
In the ordinary course of trading activities, Merrill Lynch enters into certain transactions that are documented as derivatives where a significant cash investment is made by one party. Certain derivative instruments that contain a significant financing element at inception and where Merrill Lynch is deemed to be the borrower are included in financing activities in the Consolidated Statements of Cash Flows. The cash flows from all other derivative transactions that do not contain a significant financing element at inception are included in operating activities.
 
Investment Securities
 
Investment securities consist of marketable investment securities and non-qualifying investments. Refer to Note 5.
 
Marketable Investments
 
ML & Co. and certain of its non-broker-dealer subsidiaries, including Merrill Lynch banks, follow the guidance in SFAS No. 115 when accounting for investments in debt and publicly traded equity securities. Merrill Lynch classifies those debt securities that it has the intent and ability to hold to maturity as held-to-maturity securities. Held-to-maturity securities are carried at 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 SFAS No. 115 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 SFAS No. 133. Securities classified as trading are marked to fair value through earnings. All other qualifying securities are classified as available-for-sale and held at fair value with unrealized gains and losses reported in accumulated other comprehensive loss. Any unrealized losses that are deemed other-than-temporary are included in current period earnings and removed from accumulated other comprehensive loss.
 
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 generally based on the average cost method.
 
Merrill Lynch regularly (at least quarterly) evaluates each held-to-maturity and available-for-sale security whose 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 management determines that it does not have the intent and ability to hold the security for a period of time sufficient for a forecasted market price recovery up to or beyond the amortized cost of the security.
 
Merrill Lynch’s impairment review generally includes:
 
•  Identifying securities with indicators of possible impairment;
 
•  Analyzing individual securities with fair value less than amortized cost for specific factors including:
 
  •  An adverse change in cash flows
 
  •  The estimated length of time to recover from fair value to amortized cost


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  •  The severity and duration of the fair value decline from amortized cost