10-Q 1 y79235e10vq.htm FORM 10-Q e10vq
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
     
X
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2009
 
OR
     
  
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from            to           
 
Commission file number: 1-7182
 
MERRILL LYNCH & CO., INC.
(Exact name of Registrant as specified in its charter)
 
     
Delaware
  13-2740599
(State or other jurisdiction of   (I.R.S. Employer Identification No.)
incorporation or organization)
   
     
Bank of America Corporate Center
100 N. Tryon Street
Charlotte, North Carolina
 

28255
(Address of principal executive offices)
  (Zip Code)
 
(704) 386-5681
Registrant’s telephone number, including area code:
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
X     YES             NO
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
X     YES             NO
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer 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
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
As of the close of business on November 6, 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 Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with a reduced disclosure format as permitted by Instruction H(2).


 

 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
 
 
         
Part I. Financial Information
       
       
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 EX-12
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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Table of Contents

 
Item 1.  Financial Statements
 
Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings/(Loss) (Unaudited)
 
                   
    Successor Company     Predecessor Company
    Three Months Ended
    Three Months Ended
(dollars in millions, except per share amounts)   September 30, 2009     September 26, 2008
Revenues
                 
Principal transactions
  $ 214       $ (6,573 )
Commissions
    1,316         1,745  
Managed accounts and other fee-based revenues
    997         1,395  
Investment banking
    732         845  
Earnings from equity method investments
    213         4,401  
Other income (loss)
    1,657         (2,986 )
Other-than-temporary impairment losses on AFS debt securities:
                 
Total other-than-temporary impairment losses on AFS debt securities
    (306 )       -  
Portion of other-than-temporary impairment losses recognized in OCI on AFS debt securities
    1         -  
                   
Subtotal
    4,824         (1,173 )
Interest and dividend revenues
    2,685         9,019  
Less interest expense
    2,407         7,830  
                   
Net interest profit
    278         1,189  
                   
Revenues, net of interest expense
    5,102         16  
                   
Non-interest expenses
                 
Compensation and benefits
    2,768         3,483  
Communications and technology
    501         546  
Occupancy and related depreciation
    314         314  
Brokerage, clearing, and exchange fees
    240         348  
Advertising and market development
    89         159  
Professional fees
    148         242  
Office supplies and postage
    38         48  
Other
    495         588  
Payment related to price reset on common stock offering
    -         2,500  
Restructuring charge
    -         39  
                   
Total non-interest expenses
    4,593         8,267  
                   
Pre-tax earnings/(loss) from continuing operations
    509         (8,251 )
Income tax benefit
    (181 )       (3,131 )
                   
Net earnings/(loss) from continuing operations
    690         (5,120 )
                   
Discontinued operations:
                 
Pre-tax loss from discontinued operations
    -         (53 )
Income tax benefit
    -         (21 )
                   
Net loss from discontinued operations
    -         (32 )
                   
Net earnings/(loss)
  $ 690       $ (5,152 )
                   
Preferred stock dividends
    38         2,319  
                   
Net earnings/(loss) applicable to common stockholders
  $ 652       $ (7,471 )
                   
Basic loss per common share from continuing operations
    N/A       $ (5.56 )
Basic loss per common share from discontinued operations
    N/A         (0.02 )
                   
Basic loss per common share
    N/A       $ (5.58 )
                   
Diluted loss per common share from continuing operations
    N/A       $ (5.56 )
Diluted loss per common share from discontinued operations
    N/A         (0.02 )
                   
Diluted loss per common share
    N/A       $ (5.58 )
                   
Dividend paid per common share
  $ -       $ 0.35  
                   
Average shares used in computing losses per common share
                 
Basic
    N/A         1,339.0  
Diluted
    N/A         1,339.0  
 
 See Notes to Condensed Consolidated Financial Statements.


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Table of Contents

Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings/(Loss) (Unaudited)
 
                           
          Predecessor Company
    Successor Company     For the Period from
   
    Nine Months Ended
    December 27, 2008
  Nine Months Ended
(dollars in millions, except per share amounts)   September 30, 2009     to December 31, 2008   September 26, 2008
Revenues
                         
Principal transactions
  $ 4,047       $ (280 )   $ (13,074 )
Commissions
    4,049         22       5,445  
Managed accounts and other fee-based revenues
    3,118         22       4,249  
Investment banking
    2,200         12       2,920  
Earnings from equity method investments
    306         -       4,943  
Other income (loss)
    2,994         19       (6,310 )
Other-than-temporary impairment losses on AFS debt securities:
                         
Total other-than-temporary impairment losses on AFS debt securities
    (603 )       -       -  
Portion of other-than-temporary impairment losses recognized in OCI on AFS debt securities
    4         -       -  
                           
Subtotal
    16,115         (205 )     (1,827 )
Interest and dividend revenues
    9,505         34       28,415  
Less interest expense
    8,831         -       25,754  
                           
Net interest profit
    674         34       2,661  
                           
Revenues, net of interest expense
    16,789         (171 )     834  
                           
Non-interest expenses
                         
Compensation and benefits
    9,203         64       11,170  
Communications and technology
    1,395         -       1,667  
Occupancy and related depreciation
    867         -       951  
Brokerage, clearing, and exchange fees
    732         10       1,105  
Advertising and market development
    248         -       501  
Professional fees
    396         -       747  
Office supplies and postage
    115         -       160  
Other
    1,398         -       1,212  
Payment related to price reset on common stock offering
    -         -       2,500  
Restructuring charge
    -         -       484  
                           
Total non-interest expenses
    14,354         74       20,497  
                           
Pre-tax earnings/(loss) from continuing operations
    2,435         (245 )     (19,663 )
Income tax expense/(benefit)
    241         (92 )     (7,940 )
                           
Net earnings/(loss) from continuing operations
    2,194         (153 )     (11,723 )
                           
Discontinued operations:
                         
Pre-tax (loss) from discontinued operations
    -         -       (110 )
Income tax benefit
    -         -       (65 )
                           
Net loss from discontinued operations
    -         -       (45 )
                           
Net earnings/(loss)
  $ 2,194       $ (153 )   $ (11,768 )
                           
Preferred stock dividends
    91         -       2,730  
                           
Net earnings/(loss) applicable to common stockholders
  $ 2,103       $ (153 )   $ (14,498 )
                           
Basic loss per common share from continuing operations
    N/A       $ (0.10 )   $ (13.16 )
Basic loss per common share from discontinued operations
    N/A         -       (0.04 )
                           
Basic loss per common share
    N/A       $ (0.10 )   $ (13.20 )
                           
Diluted loss per common share from continuing operations
    N/A       $ (0.10 )   $ (13.16 )
Diluted loss per common share from discontinued operations
    N/A         -       (0.04 )
                           
Diluted loss per common share
    N/A       $ (0.10 )   $ (13.20 )
                           
Dividend paid per common share
  $ -       $ -     $ 1.05  
                           
Average shares used in computing losses per common share
                         
Basic
    N/A         1,600.3       1,098.6  
Diluted
    N/A         1,600.3       1,098.6  
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
                   
    Successor Company     Predecessor Company
(dollars in millions, except per share amounts)   September 30, 2009     December 26, 2008
ASSETS
                   
Cash and cash equivalents
  $ 18,697       $ 68,403  
                   
Cash and securities segregated for regulatory purposes or deposited with clearing organizations
    23,796         32,923  
                   
Securities financing transactions
                 
Receivables under resale agreements (includes $52,436 in 2009 and $62,146 in 2008 measured at fair value in accordance with the fair value option election)
    69,948         93,247  
Receivables under securities borrowed transactions (includes $993 in 2009 and $853 in 2008 measured at fair value in accordance with the fair value option election)
    53,062         35,077  
                   
      123,010         128,324  
                   
                   
Trading assets, at fair value (includes securities pledged as collateral that can be sold or repledged of $22,775 in 2009 and $18,663 in 2008):
                 
Derivative contracts
    58,190         89,477  
Corporate debt and preferred stock
    22,822         30,829  
Equities and convertible debentures
    28,018         26,160  
Non-U.S. governments and agencies
    21,538         6,107  
Mortgages, mortgage-backed, and asset-backed
    7,015         13,786  
U.S. Government and agencies
    3,632         5,253  
Municipals, money markets and physical commodities
    6,838         3,993  
                   
      148,053         175,605  
                   
                   
Investment securities (includes $272 in 2009 and $2,770 in 2008 measured at fair value in accordance with the fair value option election) (includes securities pledged as collateral that can be sold or repledged of $0 in 2009 and $2,557 in 2008)
    33,916         57,007  
                   
Securities received as collateral, at fair value
    15,224         11,658  
                   
Receivables from Bank of America
    21,446         -  
                   
Other receivables
                 
Customers (net of allowance for doubtful accounts of $0 in 2009 and $143 in 2008)
    27,136         51,131  
Brokers and dealers
    10,411         12,410  
Interest and other
    14,750         26,331  
                   
      52,297         89,872  
                   
                   
Loans, notes, and mortgages (net of allowances for loan losses of $114 in 2009 and $2,072 in 2008) (includes $4,765 in 2009 and $979 in 2008 measured at fair value in accordance with the fair value option election)
    67,729         69,190  
                   
Equipment and facilities (net of accumulated depreciation and amortization of $571 in 2009 and $5,856 in 2008)
    2,444         2,928  
                   
Goodwill and other intangible assets
    9,326         2,616  
                   
Other assets
    20,119         29,017  
                   
                   
Total Assets
  $ 536,057       $ 667,543  
                   


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Table of Contents

Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
 
                   
    Successor Company     Predecessor Company
(dollars in millions, except per share amounts)   September 30, 2009     December 26, 2008
LIABILITIES
                 
                   
Securities financing transactions
                 
Payables under repurchase agreements (includes $49,501 in 2009 and $32,910 in 2008 measured at fair value in accordance with the fair value option election)
  $ 65,966       $ 92,654  
Payables under securities loaned transactions
    21,369         24,426  
                   
      87,335         117,080  
                   
Short-term borrowings (includes $568 in 2009 and $3,387 in 2008 measured at fair value in accordance with the fair value option election)
    686         37,895  
                   
Deposits
    47,819         96,107  
                   
Trading liabilities, at fair value
                 
Derivative contracts
    41,440         71,363  
Equities and convertible debentures
    12,715         7,871  
Non-U.S. governments and agencies
    19,906         4,345  
Corporate debt and preferred stock
    1,622         1,318  
U.S. Government and agencies
    1,564         3,463  
Municipals, money markets and other
    967         1,111  
                   
      78,214         89,471  
                   
Obligation to return securities received as collateral, at fair value
    15,224         11,658  
                   
Payables to Bank of America
    26,864         -  
                   
Other payables
                 
Customers
    38,547         44,924  
Brokers and dealers
    16,444         12,553  
Interest and other (includes $287 in 2009 measured at fair value in accordance with the fair value option election)
    21,359         32,918  
                   
      76,350         90,395  
                   
Long-term borrowings (includes $48,847 in 2009 and $49,521 in 2008 measured at fair value in accordance with the fair value option election)
    161,444         199,678  
Junior subordinated notes (related to trust preferred securities)
    3,546         5,256  
                   
Total Liabilities
    497,482         647,540  
                   
COMMITMENTS AND CONTINGENCIES
                 
                   
STOCKHOLDERS’ EQUITY
                 
                   
Preferred Stockholders’ Equity; authorized 25,000,000 shares;
                 
(liquidation preference of $30,000 per share; issued: 2008 — 244,100 shares;
                 
liquidation preference of $1,000 per share; issued: 2008 — 115,000 shares; liquidation preference of $100,000 per share; issued: 2009 — 17,000 shares; issued: 2008 — 17,000 shares)
    1,541         8,605  
Common Stockholders’ Equity
                 
Common stock (par value $1.331/3 per share; authorized: 3,000,000,000 shares; issued: 2009 — 1,000 shares; issued: 2008 — 2,031,995,436 shares)
    -         2,709  
Paid-in capital
    34,969         47,232  
Accumulated other comprehensive (loss) (net of tax)
    (38 )       (6,318 )
Retained earnings/ (Accumulated deficit)
    2,103         (8,603 )
                   
      37,034         35,020  
                   
                   
Less: Treasury stock, at cost (2009 — None; 2008 — 431,742,565 shares)
    -         23,622  
                   
Total Common Stockholders’ Equity
    37,034         11,398  
                   
Total Stockholders’ Equity
    38,575         20,003  
                   
Total Liabilities and Stockholders’ Equity
  $ 536,057       $ 667,543  
                   
 
 See Notes to Condensed Consolidated Financial Statements.


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Table of Contents

Merrill Lynch & Co., Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
 
                   
    Successor Company     Predecessor Company
    Nine Months Ended
    Nine Months Ended
(dollars in millions)   September 30, 2009     September 26, 2008
Cash flows from operating activities:
                 
Net earnings/(loss)
  $ 2,194       $ (11,768 )
Adjustments to reconcile net earnings/(loss) to cash provided by operating activities
                 
Depreciation and amortization
    896         671  
Share-based compensation expense
    579         1,787  
Payment related to price reset on common stock offering
    -         2,500  
Deferred taxes
    613         (5,571 )
Gain on sale of Bloomberg L.P. 
    -         (4,296 )
Earnings/(loss) from equity method investments
    (306 )       (146 )
Other
    (729 )       6,140  
Changes in operating assets and liabilities:
                 
Trading assets
    21,400         45,311  
Cash and securities segregated for regulatory purposes
                 
or deposited with clearing organizations
    6,018         658  
Receivables from Bank of America
    (51,279 )       -  
Receivables under resale agreements
    33,799         57,151  
Receivables under securities borrowed transactions
    (17,421 )       33,544  
Customer receivables
    6,678         (13,359 )
Brokers and dealers receivables
    2,000         (10,905 )
Proceeds from loans, notes, and mortgages held for sale
    7,923         18,550  
Other changes in loans, notes, and mortgages held for sale
    (6,100 )       (1,264 )
Trading liabilities
    (11,437 )       (37,082 )
Payables under repurchase agreements
    (21,188 )       (63,702 )
Payables under securities loaned transactions
    (3,057 )       (10,686 )
Payables to Bank of America
    26,864         -  
Customer payables
    (6,385 )       5,805  
Brokers and dealers payables
    3,891         3,398  
Trading investment securities
    209         942  
Other, net
    11,264         (14,708 )
                   
Cash provided by operating activities
    6,426         2,970  
                   
Cash flows from investing activities:
                 
Proceeds from (payments for):
                 
Maturities of available-for-sale securities
    5,692         5,978  
Sales of available-for-sale securities
    9,613         27,218  
Purchases of available-for-sale securities
    (556 )       (29,121 )
Proceeds from the sale of discontinued operations
    -         12,576  
Equipment and facilities, net
    (100 )       (593 )
Loans, notes, and mortgages held for investment
    3,559         (11,240 )
Other investments
    3,354         1,909  
                   
Cash provided by investing activities
    21,562         6,727  
                   
Cash flows from financing activities:
                 
Proceeds from (payments for):
                 
Commercial paper and short-term borrowings
    (36,798 )       779  
Issuance and resale of long-term borrowings
    7,102         64,851  
Settlement and repurchases of long-term borrowings
    (46,489 )       (83,353 )
Capital contributions from Bank of America
    6,850         -  
Deposits
    7,514         (13,986 )
Derivative financing transactions
    18         554  
Issuance of common stock
    -         9,885  
Issuance of preferred stock, net
    -         9,281  
Other common stock transactions
    -         (822 )
Excess tax benefits related to share-based compensation
    -         39  
Dividends
    (91 )       (1,865 )
                   
Cash (used for) financing activities
    (61,894 )       (14,637 )
                   
(Decrease) in cash and cash equivalents
    (33,906 )       (4,940 )
Cash and cash equivalents, beginning of period(1)
    52,603         41,346  
                   
Cash and cash equivalents, end of period
  $ 18,697       $ 36,406  
                   
Supplemental Disclosure of Cash Flow Information:
                 
Income taxes paid (net of refunds)
  $ 269       $ 422  
Interest paid
    9,739         26,529  
Non-cash investing and financing activities:
 
In connection with the acquisition of Merrill Lynch by Bank of America, Merrill Lynch recorded purchase accounting adjustments in the nine months ended September 30, 2009, which were recorded as non-cash capital contributions. See Note 2.
 
In connection with the sale of Merrill Lynch Bank USA to a subsidiary of Bank of America, Merrill Lynch received a note receivable as consideration for the net book value of assets and liabilities transferred to Bank of America. See Note 21.
 
 
(1) Amount for Successor Company is as of January 1, 2009.
 
 See Notes to Condensed Consolidated Financial Statements.


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    Successor Company     Predecessor Company
    Three Months
  Nine Months
    Three Months
  Nine Months
    Ended
  Ended
    Ended
  Ended
(dollars in millions)   September 30, 2009   September 30, 2009     September 26, 2008   September 26, 2008
Net earnings/(loss)
  $ 690     $ 2,194       $ (5,152 )   $ (11,768 )
Other comprehensive income/(loss), net of tax:
                                 
Foreign currency translation adjustment
    193       74         (141 )     (189 )
Net unrealized (loss) on investment securities available-for-sale
    (680 )     (146 )       (544 )     (2,358 )
Net deferred gain/(loss) on cash flow hedges
    28       34         37       (3 )
Defined benefit pension and postretirement plans
    -       -         (1 )     5  
                                   
Total other comprehensive (loss), net of tax
    (459 )     (38 )       (649 )     (2,545 )
                                   
Comprehensive income/(loss)
  $ 231     $ 2,156       $ (5,801 )   $ (14,313 )
                                   
 
 See Notes to Condensed Consolidated Financial Statements.


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Merrill Lynch & Co., Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2009
 
 
Description of Business
 
Merrill Lynch & Co. Inc. (“ML & Co.”) and together with its subsidiaries (“Merrill Lynch”), 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. For a complete discussion of significant accounting policies, refer to the Audited Consolidated Financial Statements included in Merrill Lynch’s Annual Report on Form 10-K for the year-ended December 26, 2008 (the “2008 Annual Report”).
 
Bank of America Acquisition
 
On January 1, 2009, Merrill Lynch (the “Predecessor Company”) 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. (the “Successor Company”) 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 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). 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 were 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.
 
Bank of America’s cost of acquiring Merrill Lynch has been pushed down to form a new accounting basis for Merrill Lynch. Accordingly, the accompanying Condensed Consolidated Financial Statements are presented for two periods, Predecessor and Successor, which respectively correspond to the periods preceding and succeeding the date of acquisition. The Predecessor and Successor periods have been separated by a vertical line on the face of the Condensed Consolidated Financial Statements to highlight the fact that the financial information for such periods has been prepared under two different cost bases of accounting. The components of the Predecessor Company’s shareholders’ equity (with the exception of $1.5 billion of convertible preferred stock discussed above) were reclassified to paid-in-capital on January 1, 2009.
 
Effective January 1, 2009, Merrill Lynch adopted calendar quarter-end and year-end reporting periods to coincide with those of Bank of America. The intervening period between Merrill Lynch’s previous fiscal year end (December 26, 2008) and the beginning of the current year (January 1, 2009) (the “stub period”) is presented separately on the accompanying Condensed Consolidated Statements of Earnings/(Loss) for the nine months ended September 30, 2009.
 
Basis of Presentation
 
The Condensed Consolidated Financial Statements include the accounts of Merrill Lynch. The Condensed Consolidated Financial Statements are presented in accordance with U.S. Generally


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Accepted Accounting Principles. Intercompany transactions and balances within Merrill Lynch have been eliminated. Transactions and balances with Bank of America have not been eliminated. The interim Condensed Consolidated Financial Statements for the three and nine month periods and the stub period are unaudited; however, all adjustments necessary for a fair presentation of the Condensed Consolidated Financial Statements have been included.
 
During the third quarter of 2009, Merrill Lynch adjusted previously reported prior period 2009 amounts related to the valuation of certain long-term borrowings, primarily structured notes. The impact of these adjustments reduced principal transactions revenues by $252 million and $178 million and net earnings by $176 million and $160 million for the first and second quarters of 2009, respectively. The results for the three and nine months ended September 30, 2009 are appropriately stated. Historical quarterly results presented in future filings will include the impact of these revisions.
 
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the 2008 Annual Report, while recognizing that two different bases of accounting are presented. The nature of Merrill Lynch’s business is such that the results of any interim period are not necessarily indicative of results for a full year. Merrill Lynch evaluates subsequent events through the date of filing with the Securities and Exchange Commission. Certain prior period amounts have been reclassified to conform to the current period presentation. In addition, certain changes have been made to classifications in the financial statements as of and for the three and nine months ended September 30, 2009 to conform to Bank of America’s presentation of similar transactions. These changes include:
 
•  The reclassification of bifurcated embedded derivatives from the balance sheet classification of the host instrument (e.g., long-term borrowings for structured notes) to derivative contracts within trading assets and liabilities;
 
•  The reclassification of derivatives that had been used for asset and liability management hedging from other assets and other payables-interest and other to derivative contracts within trading assets and trading liabilities;
 
•  The reclassification of certain loans designated as held for trading, held for sale or held for investment to either held for sale or held for investment; and
 
•  The reclassification of the financing provided to Bloomberg, Inc. in connection with the sale of Merrill Lynch’s interest in Bloomberg, L.P. from investment securities to loans, notes and mortgages.
 
Merrill Lynch did not make any significant changes to its Predecessor Company accounting policies in order to conform with the accounting policies utilized by Bank of America.
 
In July 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles, (ASC 105), which approved the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental GAAP. The Codification is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all other accounting literature not included in the Codification will be considered nonauthoritative. The adoption of ASC 105 did not impact Merrill Lynch’s financial condition or results of operations. All accounting references within this report are in accordance with the new Codification.


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Consolidation Accounting Policies
 
The Condensed 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 — 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 ASC 810, Consolidation, (“Consolidation Accounting”), 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 ASC 323, Investments — Equity Method and Joint Ventures (“Equity Method Accounting”), which requires use of the equity method of accounting for investors that have more than a minor influence, which is typically defined as an investment of greater than 3% of the outstanding equity in the entity. For more traditional corporate structures, in accordance with Equity Method Accounting, Merrill Lynch applies the equity method of accounting where it has 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 Consolidation Accounting. 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 that they may hold, the derivatives into which they can enter and the level of discretion that they may exercise through servicing activities. In accordance with ASC 860, Transfers and Servicing, (“Financial Transfers and Servicing Accounting”), and Consolidation Accounting, 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 through holding tranches of the securitization. In accordance with Financial Transfers and Servicing Accounting, Merrill Lynch recognizes transfers of financial assets where it relinquishes control as sales to the extent of cash and any 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;


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•  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 market participants. Gains and losses on sales are recognized on a trade date basis.
 
Commissions revenues include commissions, mutual fund distribution fees and contingent deferred sales charge revenue, which are all accrued as earned. Commissions revenues also include mutual fund redemption fees, which are recognized at the time of redemption. Commissions revenues earned from certain customer equity transactions are recorded net of related brokerage, clearing and exchange fees.
 
Managed 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.
 
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.
 
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 Condensed Consolidated Financial Statements, management makes estimates regarding:
 
•  Valuations of assets and liabilities requiring fair value estimates;
 
•  The allowance for credit losses;


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•  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 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 Condensed Consolidated Financial Statements, and it is possible that such changes could occur in the near term.
 
Fair Value Measurement
 
Merrill Lynch accounts for a significant portion of its financial instruments at fair value or considers fair value in their measurement. Merrill Lynch accounts for certain financial assets and liabilities at fair value under various accounting literature, including ASC 320, Investments — Debt and Equity Securities, (“Investment Accounting”), ASC 815, Derivatives and Hedging, (“Derivatives Accounting”), and the fair value option election in accordance with ASC 825-10-25, Financial Instruments — Recognition, (“fair value option election”). Merrill Lynch also accounts for certain assets at fair value under applicable industry guidance, namely ASC 940 Financial Services — Brokers and Dealers (“Broker-Dealer Guide”) and ASC 946, Financial Services — Investment Companies (“Investment Company Guide”).
 
ASC 820, Fair Value Measurements and Disclosures, (“Fair Value Accounting”) defined fair value, established a framework for measuring fair value, established a fair value hierarchy based on the quality of inputs used to measure fair value and enhanced disclosure requirements for fair value measurements.
 
Fair values for over-the-counter (“OTC”) derivative financial instruments, principally forwards, options, and swaps, represent the present value of amounts estimated to be received from or paid to a marketplace participant in settlement of these instruments (i.e., the amount Merrill Lynch would expect to receive in a derivative asset assignment or would expect to pay to have a derivative liability assumed). These derivatives are valued using pricing models based on the net present value of estimated future cash flows and directly observed prices from exchange-traded derivatives, other OTC trades, or external pricing services, while taking into account the counterparty’s creditworthiness, or Merrill Lynch’s own creditworthiness, as appropriate. 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 Condensed Consolidated Financial Statements. For instance, on long-dated and illiquid contracts


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extrapolation methods are applied to observed market data in order to estimate inputs and assumptions that are not directly observable. This enables Merrill Lynch to mark to fair value all positions consistently when only a subset of prices are directly observable. Values for OTC derivatives are verified using observed information about the costs of hedging the risk and other trades in the market. As the markets for these products develop, Merrill Lynch continually refines its pricing models to correlate more closely to the market price of these instruments. The recognition of significant inception gains and losses that incorporate unobservable inputs is reviewed by management to ensure such gains and losses are derived from observable inputs and/or incorporate reasonable assumptions about the unobservable component, such as implied bid-offer adjustments.
 
Certain financial instruments recorded at fair value are initially measured using mid-market prices which results in gross long and short positions 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 Fair Value Accounting. The significant adjustments include liquidity and counterparty credit risk.
 
Liquidity
 
Merrill Lynch makes adjustments to bring a position from a mid-market to a bid or offer price, depending upon the net open position. Merrill Lynch values net long positions at bid prices and net short positions at offer prices. These adjustments are based upon either observable or implied bid-offer prices.
 
Counterparty Credit Risk
 
In determining fair value, Merrill Lynch considers both the credit risk of its counterparties, as well as its own creditworthiness. Merrill Lynch attempts to mitigate credit risk to third parties by entering into netting and collateral arrangements. Net counterparty exposure (counterparty positions netted by offsetting transactions and both cash and securities collateral) is then valued for counterparty creditworthiness and 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.
 
Fair Value Accounting also requires that Merrill Lynch consider its own creditworthiness when determining the fair value of certain instruments, including OTC derivative instruments. The approach to measuring the 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 instruments such as 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.


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Income Taxes
 
Merrill Lynch provides for income taxes on all transactions that have been recognized in the Condensed Consolidated Financial Statements in accordance with ASC 740, Income Taxes (“Income Tax Accounting”). Accordingly, deferred taxes are adjusted to reflect the tax rates at which future taxable amounts will likely be settled or realized. The effects of tax rate changes on deferred tax liabilities and deferred tax assets, as well as other changes in income tax laws, are recognized in net earnings in the period during which such changes are enacted. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are more-likely-than-not to be realized. Pursuant to Income Tax Accounting, Merrill Lynch may assess various sources of evidence in the conclusion as to the necessity of valuation allowances to reduce deferred tax assets to amounts more-likely-than-not to be realized, including the following: 1) past and projected earnings, including losses, of Merrill Lynch and Bank of America, as certain tax attributes such as U.S. net operating losses (“NOLs”), U.S. capital loss carryforwards and foreign tax credit carryforwards can be utilized by Bank of America in certain income tax returns, 2) tax carryforward periods, and 3) tax planning strategies and other factors of the legal entities, such as the intercompany tax-allocation policy. Included within Merrill Lynch’s net deferred tax assets are carryforward amounts generated in the U.S. and United Kingdom (“U.K.”) that are deductible in the future as NOLs. Merrill Lynch has concluded that these deferred tax assets are more-likely-than-not to be fully utilized prior to expiration, based on the projected level of future taxable income of Merrill Lynch and Bank of America, which is relevant due to the intercompany tax-allocation policy. For this purpose, future taxable income was projected based on forecasts and historical earnings after adjusting for the past market disruptions and the anticipated impact of the differences between pre-tax earnings and taxable income.
 
Merrill Lynch recognizes and measures its unrecognized tax benefits in accordance with Income Tax Accounting. Merrill Lynch estimates the likelihood, based on their technical merits, that tax positions will be sustained upon examination considering the facts and circumstances and information available at the end of each period. Merrill Lynch adjusts the level of unrecognized tax benefits when there is more information available, or when an event occurs requiring a change. In accordance with Bank of America’s policy, any new or subsequent change in an unrecognized tax benefit related to a Bank of America state consolidated, combined or unitary return in which Merrill Lynch is a member will not be reflected in Merrill Lynch’s balance sheet. However, upon Bank of America’s resolution of the item, any material impact determined to be attributable to Merrill Lynch will be reflected in Merrill Lynch’s balance sheet. Merrill Lynch accrues income-tax-related interest and penalties, if applicable, within income tax expense.
 
Beginning with the 2009 tax year, Merrill Lynch’s results of operations are included in the U.S. federal income tax return and certain state income tax returns of Bank of America. The method of allocating income tax expense is determined under the intercompany tax allocation policy of Bank of America. This policy specifies that income tax expense will be computed for all Bank of America subsidiaries generally on a separate company method, taking into account the tax position of the consolidated group and the pro forma Merrill Lynch group. Under this policy, tax benefits associated with net operating losses (or other tax attributes) of Merrill Lynch are payable to Merrill Lynch upon the earlier of the utilization in the filing of Bank of America’s returns or the utilization in Merrill Lynch’s pro forma returns. See Note 16 for further discussion of income taxes.
 
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.


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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. Resale and repurchase agreements recorded at fair value are generally valued based on pricing models that use inputs with observable levels of price transparency.
 
Where the fair value option election has been made, changes in the fair value of resale and repurchase agreements are reflected in principal transactions revenues and the contractual interest coupon is recorded as interest revenue or interest expense, respectively. For further information refer to Note 4.
 
Resale and repurchase agreements recorded at their contractual amounts plus accrued interest approximate fair value, as the fair value of these items is not materially sensitive to shifts in market interest rates because of the short-term nature of these instruments and/or variable interest rates or to credit risk because the resale and repurchase agreements are 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 receivables and payables with the same counterparty. Merrill Lynch offsets certain repurchase and resale agreement balances with the same counterparty on the Condensed 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 Securities Exchange Act of 1934.
 
Securities borrowed and loaned transactions may be recorded at the amount of cash collateral advanced or received plus accrued interest or at fair value under the fair value option election. Securities borrowed transactions require Merrill Lynch to provide the counterparty with collateral in the form of cash, letters of credit, or other securities. Merrill Lynch receives collateral in the form of cash or other securities for securities loaned transactions. For these transactions, the fees received or paid by Merrill Lynch are recorded as interest revenue or expense. 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 Condensed Consolidated Balance Sheets.
 
In transactions where Merrill Lynch acts as the lender in a securities lending agreement and receives securities that can be pledged or sold as collateral, it recognizes an asset on the Condensed Consolidated Balance Sheets carried at fair value, representing the securities received (securities received as collateral), and a liability for the same amount, representing the obligation to return those securities (obligation to return securities received as collateral). The amounts on the Condensed Consolidated Balance Sheets result from non-cash transactions.


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Trading Assets and Liabilities
 
Merrill Lynch’s trading activities consist primarily of securities brokerage and trading; derivatives dealing and brokerage; commodities trading and futures brokerage; and securities financing transactions. Trading assets and trading liabilities consist of cash instruments (e.g., securities and loans) and derivative instruments. Trading assets and trading liabilities also include commodities inventory. See Note 6 for additional information on derivative instruments.
 
Trading assets and liabilities are generally recorded on a trade date basis at fair value. Included in trading liabilities are securities that Merrill Lynch has sold but did not own and will therefore be obligated to purchase at a future date (“short sales”). Commodities inventory is recorded at the lower of cost or 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.
 
Investment Securities
 
Investment securities consist of marketable investment securities and non-qualifying investments. Refer to Note 8.
 
Marketable Investments
 
ML & Co. and certain of its non-broker-dealer subsidiaries, including Merrill Lynch banks, follow the guidance within Investment Accounting for investments in debt and publicly traded equity securities. Merrill Lynch classifies those debt securities that it does not intend to sell as held-to-maturity securities. Held-to-maturity securities are carried at cost unless a decline in value is deemed other-than-temporary, in which case the carrying value is reduced. For Merrill Lynch, the trading classification under Investment Accounting generally includes those securities that are bought and held principally for the purpose of selling them in the near term, securities that are economically hedged, or securities that may contain a bifurcatable embedded derivative as defined in Derivatives Accounting. Securities classified as trading are marked to fair value through earnings. All other qualifying securities are classified as available-for-sale and held at fair value with unrealized gains and losses reported in accumulated other comprehensive income/(loss) (“OCI”).
 
Realized gains and losses on investment securities are included in current period earnings. For purposes of computing realized gains and losses, the cost basis of each investment sold is based on the specific identification method.
 
Merrill Lynch regularly (at least quarterly) evaluates each held-to-maturity and 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 Merrill Lynch either plans to sell the security or it is more likely than not that it will be required to sell the security before recovery of its amortized cost. Beginning in 2009, for unrealized losses on debt securities that are deemed other-than-temporary, the credit component of an other-than-temporary impairment is recognized in earnings and the noncredit component is recognized in OCI when Merrill Lynch does not intend to sell the security and it is more likely than not that Merrill Lynch will not be required to sell the security prior to recovery. Prior to January 1, 2009, unrealized losses (both the credit and non-credit components) on available-for-sale debt securities that were deemed other-than-temporary were included in current period earnings.


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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:
 
  •  The estimated length of time to recover from fair value to amortized cost;
 
  •  The severity and duration of the fair value decline from amortized cost;
 
  •  Deterioration in the financial condition of the issuer;
 
•  Discussing evidential matter, including an evaluation of the factors that could cause individual securities to have an other-than-temporary impairment;
 
•  Determining whether Merrill Lynch intends to sell the security or if it is more likely than not that Merrill Lynch will be required to sell the security before recovery of its amortized cost; and
 
•  Documenting the analysis and conclusions.
 
Non-Qualifying Investments
 
Non-qualifying investments are those investments that are not within the scope of Investment Accounting and primarily include private equity investments accounted for at fair value and securities carried at cost or under the equity method of accounting.
 
Private equity investments that are held for capital appreciation and/or current income are accounted for under the Investment Company Guide and carried at fair value. Additionally, certain private equity investments that are not accounted for under the Investment Company Guide may be carried at fair value under the fair value option election. The carrying value of private equity investments reflects expected exit values based upon market prices or other valuation methodologies including market comparables of similar companies and expected cash flows.
 
Merrill Lynch has non-controlling investments in the common shares of corporations and in partnerships that do not fall within the scope of Investment Accounting or the Investment Company Guide. Merrill Lynch accounts for these investments using either the cost or the equity method of accounting based on management’s ability to influence the investees. See the Consolidation Accounting Policies section of this Note for more information.
 
For investments accounted for using the equity method, income is recognized based on Merrill Lynch’s share of the earnings or losses of the investee. Dividend distributions are generally recorded as reductions in the investment balance. Impairment testing is based on the guidance provided in Equity Method Accounting and the investment is reduced when an impairment is deemed other-than-temporary.
 
For investments accounted for at cost, income is recognized as dividends are received. Impairment testing is based on the guidance provided in Investment Accounting and the cost basis is reduced when an impairment is deemed other-than-temporary.


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Loans, Notes, and Mortgages, Net
 
Merrill Lynch’s lending and related activities include loan originations, syndications and securitizations. Loan originations include corporate and institutional loans, residential and commercial mortgages, asset-based loans, and other loans to individuals and businesses. Merrill Lynch also engages in secondary market loan trading (see the Trading Assets and Liabilities section within this Note) and margin lending. Loans included in loans, notes, and mortgages are classified for accounting purposes as loans held for investment and loans held for sale. Upon completion of the acquisition of Merrill Lynch by Bank of America, certain loans carried by Merrill Lynch were subject to the requirements of ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“Acquired Impaired Loan Accounting”). See Note 10.
 
Loans held for investment are carried at amortized cost, less an allowance for loan losses. The provision for loan losses is based on management’s estimate of the amount necessary to maintain the allowance for loan losses at a level adequate to absorb probable incurred loan losses and is included in interest revenue in the Condensed Consolidated Statements of Earnings/(Loss). Management’s estimate of loan losses is influenced by many factors, including adverse situations that may affect the borrower’s ability to repay, current economic conditions, prior loan loss experience, and the estimated fair value of any underlying collateral. The fair value of collateral is generally determined by third-party appraisals in the case of residential mortgages, quoted market prices for securities, or other types of estimates for other assets.
 
Management’s estimate of loan losses includes judgment about collectibility based on available information at the balance sheet date, and the uncertainties inherent in those underlying assumptions.
 
While management has based its estimates on the best information available, future adjustments to the allowance for loan losses may be necessary as a result of changes in the economic environment or variances between actual results and the original assumptions.
 
In general, loans are evaluated for impairment when they are greater than 90 days past due or exhibit credit quality weakness. Loans are considered impaired when it is probable that Merrill Lynch will not be able to collect the contractual principal and interest due from the borrower. All payments received on impaired loans are applied to principal until the principal balance has been reduced to a level where collection of the remaining recorded investment is not in doubt. Typically, when collection of principal on an impaired loan is not in doubt, contractual interest will be credited to interest income when received.
 
Loans held for sale are carried at lower of cost or fair value. The fair value option election has been made for certain held for sale loans, notes and mortgages. Estimation is required in determining these fair values. The fair value of loans made in connection with commercial lending activity, consisting mainly of senior debt, is primarily estimated using the market value of publicly issued debt instruments or discounted cash flows. Merrill Lynch’s estimate of fair value for other loans, notes, and mortgages is determined based on the individual loan characteristics. For certain homogeneous categories of loans, including residential mortgages, automobile loans, and home equity loans, fair value is estimated using a whole loan valuation or an “as-if” securitized price based on market conditions. An “as-if” securitized price is based on estimated performance of the underlying asset pool collateral, rating agency credit structure assumptions and market pricing for similar securitizations previously executed. Declines in the carrying value of loans held for sale and loans accounted for at fair value under the fair value option election are included in other revenues in the Condensed Consolidated Statements of Earnings/(Loss).
 
Nonrefundable loan origination fees, loan commitment fees, and “draw down” fees received in conjunction with held for investment loans are generally deferred and recognized over the contractual


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life of the loan as an adjustment to the yield. If, at the outset, or any time during the term of the loan, it becomes probable that the repayment period will be extended, the amortization is recalculated using the expected remaining life of the loan. When the loan contract does not provide for a specific maturity date, management’s best estimate of the repayment period is used. At repayment of the loan, any unrecognized deferred fee is immediately recognized in earnings. If the loan is accounted for as held for sale, the fees received are deferred and recognized as part of the gain or loss on sale in other revenues. If the loan is accounted for under the fair value option election, the fees are included in the determination of the fair value and included in other revenue.
 
New Accounting Pronouncements
 
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 (“SFAS No. 166”), and SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”). The amendments will be effective January 1, 2010 for Merrill Lynch. SFAS No. 166 revises ASC 860, Transfers and Servicing (“Financial Transfers and Servicing Accounting”), which establishes sale accounting criteria for transfers of financial assets. Among other things, SFAS No. 166 amends Financial Transfers and Servicing Accounting to eliminate the concept of a QSPE. As a result, existing QSPEs will be subject to consolidation in accordance with the guidance provided in SFAS No. 167.
 
SFAS No. 167 amends Consolidation Accounting by significantly changing the criteria by which an enterprise determines whether it must consolidate a VIE. A VIE is an entity, typically an SPE, which has insufficient equity at risk or which is not controlled through voting rights held by equity investors. Consolidation Accounting currently requires that a VIE be consolidated by the enterprise that will absorb a majority of the expected losses or expected residual returns created by the assets of the VIE. SFAS No. 167 amends Consolidation Accounting to require that a VIE be consolidated by the enterprise that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. SFAS No. 167 also requires that an enterprise continually reassess, based on current facts and circumstances, whether it should consolidate the VIEs with which it is involved. See Note 9 for Merrill Lynch’s involvement with VIEs.
 
The adoption in January 2010 of SFAS Nos. 166 and 167 will result in the consolidation of certain QSPEs and VIEs that are not currently recorded on Merrill Lynch’s Condensed Consolidated Balance Sheets. Based upon the evaluation performed as of September 30, 2009, Merrill Lynch expects to consolidate certain vehicles, including credit-linked note entities, collateralized debt obligations and municipal bond trusts, which hold aggregate assets of approximately $15 billion. These consolidations will result in an increase in trading assets and long-term borrowings. Merrill Lynch continues to evaluate other VIEs with which it is involved to determine the impact of SFAS No. 167.
 
In May 2009, the FASB issued ASC 855, Subsequent Events, which provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In addition, ASC 855 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The adoption of ASC 855, effective June 30, 2009, did not impact Merrill Lynch’s financial condition or results of operations. Merrill Lynch evaluated subsequent events through the date of filing.
 
In April 2009, the FASB amended Fair Value Accounting to provide guidance for determining whether a market is inactive and a transaction is distressed. Merrill Lynch elected to early adopt the amendments effective January 1, 2009. The adoption did not have a material impact on the Condensed Consolidated Financial Statements.


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In April 2009, the FASB amended Investment Accounting to require that an entity recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the noncredit component in OCI when the entity does not intend to sell the security and it is more likely than not that the entity will not be required to sell the security prior to recovery. The amendments also require expanded disclosures. Merrill Lynch elected to early adopt the amendments effective January 1, 2009 and the adoption did not have a material impact on the Condensed Consolidated Financial Statements, as any OCI that Merrill Lynch previously recorded was eliminated upon Bank of America’s acquisition of Merrill Lynch. The amendments did not change the recognition of other-than-temporary impairment for equity securities.
 
In April 2009, the FASB amended ASC 825, Financial Instruments, to require expanded disclosures for all financial instruments within its scope, such as loans that are not measured at fair value through earnings. Merrill Lynch adopted the amendments during the second quarter of 2009. Since the amendments only require certain additional disclosures, they did not affect Merrill Lynch’s consolidated financial position, results of operations or cash flows. Refer to Note 5 for further information.
 
In April 2009, the FASB amended ASC 805-10, Business Combinations, whereby assets acquired and liabilities assumed in a business combination that arise from contingencies should be recognized at fair value on the acquisition date if fair value can be determined during the measurement period. If fair value cannot be determined, companies should typically account for the acquired contingencies using existing guidance. This new guidance is effective for new acquisitions consummated on or after January 1, 2009. Bank of America applied this guidance to its January 1, 2009 acquisition of Merrill Lynch, and the effects of the adoption were not material to these Condensed Consolidated Financial Statements.
 
In March 2008, the FASB amended Derivatives Accounting to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. The amendments apply to all derivative instruments within the scope of Derivatives Accounting. The amendments also apply to non-derivative hedging instruments and all hedged items designated and qualifying as hedges under Derivatives Accounting. The amendments require additional qualitative and quantitative disclosures for derivative instruments and hedging activities set forth in Derivatives Accounting and generally increase the level of disaggregation required in an entity’s financial statements. Additional disclosures include qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk related contingent features in derivative agreements. Merrill Lynch adopted the amendments to Derivatives Accounting on January 1, 2009, effective prospectively. Since the amendments only resulted in certain additional disclosures, they did not have an effect on Merrill Lynch’s consolidated financial position, results of operations or cash flows. See Note 6 for further information regarding these disclosures.
 
In February 2008, the FASB modified Financial Transfers and Servicing Accounting. Under this new guidance, there is a presumption that the initial transfer of a financial asset and subsequent repurchase financing involving the same asset are considered part of the same arrangement (i.e. a linked transaction) under Financial Transfers and Servicing Accounting. However, if certain criteria are met, the initial transfer and repurchase financing will be evaluated as two separate transactions under Financial Transfers and Servicing Accounting. This new guidance was effective for new transactions entered into in fiscal years beginning after November 15, 2008. Early adoption was prohibited. The adoption of this guidance did not have a material impact on the Condensed Consolidated Financial Statements.


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In December 2007, the FASB amended Consolidation Accounting to require noncontrolling interests in subsidiaries (formerly known as “minority interests”) initially to be measured at fair value and classified as a separate component of equity. Under the amendments, gains or losses on sales of noncontrolling interests in subsidiaries are not recognized; instead, sales of noncontrolling interests are accounted for as equity transactions. However, in a sale of a subsidiary’s shares that results in the deconsolidation of the subsidiary, a gain or loss is recognized for the difference between the proceeds of that sale and the carrying amount of the interest sold and a new fair value basis is established for any remaining ownership interest. The amendments were effective for Merrill Lynch beginning in 2009; earlier application was prohibited. The amendments were required to be adopted prospectively, with the exception of certain presentation and disclosure requirements (e.g., reclassifying noncontrolling interests to appear in equity), which are required to be adopted retrospectively. The adoption of the amendments did not have a material impact on the Condensed Consolidated Financial Statements.
 
In December 2007, the FASB issued ASC 805-10, Business Combinations, which significantly changed the financial accounting and reporting for business combinations. ASC 805-10 required, for example: (i) assets and liabilities to be measured at fair value as of the acquisition date, (ii) liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period with changes reflected in earnings and not goodwill, and (iii) all acquisition-related costs to be expensed as incurred by the acquirer. Bank of America applied ASC 805-10 to its January 1, 2009 acquisition of Merrill Lynch, the effects of which are included in these Condensed Consolidated Financial Statements.
 
 
As a result of the acquisition of Merrill Lynch by Bank of America, Merrill Lynch recorded the following preliminary purchase accounting adjustments. The allocation of the purchase price will be finalized upon completion of Bank of America’s analysis of the fair values of Merrill Lynch’s assets and liabilities in accordance with the acquisition method of accounting.


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(dollars in billions, except per share amounts)    
 
 
Purchase Price
       
Merrill Lynch common shares exchanged (in millions)
    1,600  
Exchange ratio
    0.8595  
         
Bank of America’s common stock issued
    1,375  
Purchase price per share of Bank of America’s common stock(1)
  $ 14.08  
         
Total value of Bank of America’s common stock and cash exchanged for fractional shares
  $ 19.4  
Merrill Lynch preferred stock(2)
    8.6  
Fair value of outstanding employee stock awards
    1.1  
         
Total purchase price
  $ 29.1  
         
Preliminary allocation of the purchase price
       
Merrill Lynch stockholders’ equity
  $ 19.9  
Merrill Lynch goodwill and intangible assets
    (2.6 )
Pre-tax adjustments to reflect acquired assets and liabilities at fair value:
       
Securities and derivatives
    (1.2 )
Loans
    (6.1 )
Intangible assets(3)
    5.7  
Other assets
    (1.5 )
Long-term borrowings(4)
    15.8  
         
Pre-tax total adjustments
    12.7  
Deferred income taxes
    (5.7 )
         
After-tax total adjustments
    7.0  
         
Fair value of net assets acquired
  $ 24.3  
         
Preliminary goodwill resulting from the acquisition by Bank of America(5)
  $ 4.8  
         
 
 
 
(1) The value of the shares of common stock exchanged with Merrill Lynch shareholders was based upon the closing price of Bank of America’s common stock at December 31, 2008, the last trading day prior to the date of acquisition.
(2) Represents Merrill Lynch’s preferred stock exchanged for Bank of America preferred stock having substantially identical terms and also includes $1.5 billion of convertible preferred stock.
(3) Consists of trade name of $1.2 billion and customer relationship and core deposit intangibles of $4.5 billion. The amortization life is 10 years for the customer relationship and core deposit intangibles, which are primarily amortized on a straight-line basis.
(4) The change in the estimated fair value of long-term borrowings of approximately $400 million had an immaterial impact on net income for the first and second quarters of 2009.
(5) No goodwill is expected to be deductible for federal income tax purposes.
 
Subsequent to the Bank of America acquisition, certain assets and liabilities were transferred at fair value between Merrill Lynch and Bank of America. These transfers were made in connection with efforts to manage risk in a more effective and efficient manner at the consolidated Bank of America level. The assets and liabilities transferred related to sales and trading activities and included positions associated with the rates and currency, equity and mortgage products trading businesses. During the nine months ended September 30, 2009, these transfers included approximately $47 billion each of assets and liabilities transferred from Merrill Lynch to Bank of America, primarily U.S. matched book repurchase positions and mortgage positions. Approximately $42 billion of assets and $19 billion of liabilities were transferred from Bank of America to Merrill Lynch, primarily equity-related positions. In addition to these transfers, Merrill Lynch also sold one of its U.S. bank subsidiaries to Bank of America during the third quarter of 2009. See Note 21.


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Segment Information
 
Prior to the acquisition by Bank of America, Merrill Lynch’s operations were organized and reported as two operating segments in accordance with the criteria in ASC 280, Segment Reporting (“Segment Reporting”): Global Markets and Investment Banking (“GMI”) and Global Wealth Management (“GWM”).
 
As a result of the acquisition by Bank of America, Merrill Lynch reevaluated the provisions of Segment Reporting in the first quarter of 2009. Pursuant to Segment Reporting, operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in determining how to allocate resources and in assessing performance. Based upon how the chief operating decision maker of Merrill Lynch reviews results in terms of allocating resources and assessing performance, it was determined that Merrill Lynch does not contain any identifiable operating segments under Segment Reporting. As a result, the financial information of Merrill Lynch is presented as a single segment.
 
Geographic Information
 
Merrill Lynch conducts its business activities through offices in the following five regions:
 
•  United States;
 
•  Europe, Middle East, and Africa (“EMEA”);
 
•  Pacific Rim;
 
•  Latin America; and
 
•  Canada.
 
The principal methodologies used in preparing the geographic information below are as follows:
 
•  Revenues and expenses are generally recorded based on the location of the employee generating the revenue or incurring the expense;
 
•  Pre-tax earnings or loss from continuing operations include the allocation of certain shared expenses among regions; and
 
•  Intercompany transfers are based primarily on service agreements.


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The information that follows, in management’s judgment, provides a reasonable representation of each region’s contribution to the consolidated net revenues and pre-tax earnings/(loss) from continuing operations:
 
                                   
(dollars in millions)
 
    Successor Company     Predecessor Company
    Three Months Ended
  Nine Months Ended
    Three Months Ended
  Nine Months Ended
    September 30, 2009   September 30, 2009     September 26, 2008   September 26, 2008
 
Net revenues
                                 
Europe, Middle East, and Africa
  $ 1,577     $ 4,642       $ (1,339 )   $ 1,061  
Pacific Rim
    378       1,772         311       1,858  
Latin America
    207       605         325       1,191  
Canada
    71       185         22       155  
                                   
Total Non-U.S. 
    2,233       7,204         (681 )     4,265  
United States(1)
    2,869       9,585         697       (3,431 )
                                   
Total net revenues
  $ 5,102     $ 16,789       $ 16     $ 834  
                                   
Pre-tax earnings (loss) from continuing operations(2)
                                 
Europe, Middle East, and Africa
  $ 885     $ 2,405       $ (2,410 )   $ (2,583 )
Pacific Rim
    (76 )     272         (275 )     46  
Latin America
    76       153         104       473  
Canada
    39       90         (12 )     16  
                                   
Total Non-U.S. 
    924       2,920         (2,593 )     (2,048 )
United States(1)
    (415 )     (485 )       (5,658 )     (17,615 )
                                   
Total pre-tax earnings (loss) from continuing operations(2)
  $ 509     $ 2,435       $ (8,251 )   $ (19,663 )
                                   
 
 
 
(1) U.S. results for the three and nine months ended September 30, 2009 included net losses of $2.1 billion and $3.5 billion, respectively, which resulted from the narrowing of Merrill Lynch’s credit spreads on the carrying values of certain long-term borrowings. Losses for the three and nine months ended September 26, 2008 were partially offset by gains of $2.8 and $5.0 billion, respectively, that resulted from the widening of Merrill Lynch’s credit spreads on the carrying value of certain long-term borrowings, and a $4.3 billion net gain related to the sale of Merrill Lynch’s ownership stake in Bloomberg L.P. (see Note 5 of the 2008 Annual Report).
(2) See Note 18 for further information on discontinued operations.
 
Note 4.  Fair Value Disclosures
 
Fair Value Accounting
 
Fair Value Hierarchy
 
In accordance with Fair Value Accounting, Merrill Lynch has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).


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Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
 
Level 1.   Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Merrill Lynch has the ability to access (examples include active exchange-traded equity securities, exchange-traded derivatives, U.S. Government securities, and certain other sovereign government obligations).
 
Level 2.   Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
 
  a)  Quoted prices for similar assets or liabilities in active markets (examples include restricted stock and U.S. agency securities);
 
  b)  Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
 
  c)  Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
 
  d)  Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (examples include certain residential and commercial mortgage-related assets, including loans, securities and derivatives).
 
Level 3.   Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include certain private equity investments, certain residential and commercial mortgage-related assets (including loans, securities and derivatives), and long-dated or complex derivatives (including certain equity and currency derivatives and long-dated options on gas and power)).
 
As required by Fair Value Accounting, when the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore gains and losses for such assets and liabilities categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Further, the following tables do not take into consideration the offsetting effect of Level 1 and 2 financial instruments entered into by Merrill Lynch that economically hedge certain exposures to the Level 3 positions.
 
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Level 3 gains and losses represent amounts incurred during the period in which the instrument was classified as Level 3. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassifications occur. Refer to the recurring and non-recurring sections within this Note for further information on net transfers in and out.


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Valuation Techniques
 
The following outlines the valuation methodologies for the most significant Level 3 positions:
 
Mortgage related positions
 
In the most liquid markets, readily available or observable prices are used in valuing mortgage related positions. In less liquid markets, the lack of securitization activity and related pricing necessitates the use of other available information and modeling techniques to approximate the fair value for some of these positions, including whole loans, derivatives, and securities.
 
Residential and commercial mortgages
 
For certain residential and commercial mortgages, Merrill Lynch employs a fundamental cash flow valuation approach. This cash flow analysis includes cumulative loss and prepayment assumptions derived from multiple inputs including mortgage remittance reports, property prices and other market data. In addition, independent third party bids received on loans are also considered for valuation purposes.
 
U.S. ABS CDOs
 
The valuation for certain of Merrill Lynch’s U.S. super senior asset-backed collateralized debt obligations (“ABS CDO”) positions is based on cash flow analysis including cumulative loss assumptions. These assumptions are derived from multiple inputs including mortgage remittance reports, housing prices and other market data. Relevant ABX indices are also analyzed as part of the overall valuation process.
 
Corporate debt, loans and auction rate securities
 
Certain corporate debt and loans, particularly those related to emerging market, leveraged and distressed companies, and auction rate securities have limited price transparency. For corporate debt and loans, where credit spread pricing is unavailable for a particular company, recent trades as well as proxy credit spreads and trends may be considered in the valuation. For leveraged loans, Merrill Lynch may also refer to certain credit indices. For auction rate securities, the pricing methodology relies upon a number of assumptions including weighted average life, coupon, discount margin and liquidity discounts. In addition, recent trades and issuer tenders may be considered in the valuation.
 
Private equity and principal investments
 
For certain private equity and principal investments held, valuation methodologies include publicly traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flows, and are subject to appropriate discounts for lack of liquidity or marketability. Certain factors which may influence changes to the fair value include, but are not limited to, recapitalizations, subsequent rounds of financing, and offerings in the equity or debt capital markets.


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Derivatives and structured notes with significant unobservable correlation
 
Merrill Lynch enters into a number of derivative contracts and issues structured notes where the performance is wholly or partly dependent on the relative performance of two or more assets. In these transactions, referred to as correlation trades, correlation between the assets can be a significant factor in the valuation. Examples of this type of transaction include: equity or foreign exchange baskets, constant maturity swap spreads (i.e., options where the performance is determined based upon the fluctuations between two benchmark interest rates), and commodity spread trades. Many correlations are available through external pricing services. Where external pricing information is not available, management uses estimates based on historical data, calibrated to more liquid market information. Unobservable credit correlation, such as that influencing the valuation of complex structured CDOs, is calibrated using a proxy approach (e.g., using implied correlation from traded credit index tranches as a proxy for calibrating correlation for a basket of single-name corporate investment grade credits that are infrequently traded).
 
Derivatives and structured notes with significant unobservable volatility
 
Merrill Lynch enters into a number of derivative contracts and issues structured notes whose values are dependent on volatilities for which market observable values are not available. These volatilities correspond to options with long-dated expiration dates, strikes significantly in or out of the money, and/or in the case of interest rate underlyings, a large tenor (i.e., an underlying interest rate reference that itself is long-dated). Merrill Lynch uses model-based extrapolation, proxy techniques, or historical analysis to derive the unobservable volatility. These methods are selected based on available market information and are used across all asset classes. Volatility estimation can have a significant impact on valuations.


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Recurring Fair Value
 
The following tables present Merrill Lynch’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2009 and December 26, 2008, respectively.
 
                                         
    Fair Value Measurements on a Recurring Basis
    Successor Company as of September 30, 2009
                Netting
   
(dollars in millions)   Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Assets:
                                       
Securities segregated for regulatory purposes or deposited with clearing organizations:
                                       
Mortgages, mortgage-backed and asset-backed
  $ -     $ 6,045     $ -     $ -     $ 6,045  
Corporate debt
    -       268       -       -       268  
Non-U.S. governments and agencies
    1,048       869       -       -       1,917  
U.S. government and agencies
    369       1,695       -       -       2,064  
                                         
Total securities segregated for regulatory purposes or deposited with clearing organizations
    1,417       8,877       -       -       10,294  
                                         
Receivables under resale agreements
    -       52,436       -       -       52,436  
Receivables under securities borrowed transactions
    -       993       -       -       993  
Trading assets, excluding derivative contracts:
                                       
Equities
    16,537       6,644       299       -       23,480  
Convertible debentures
    -       4,538       -       -       4,538  
Mortgages, mortgage-backed and asset-backed
    -       2,991       4,024       -       7,015  
Corporate debt
    -       7,626       8,796       -       16,422  
Preferred stock(2)
    325       -       6,075       -       6,400  
Non-U.S. governments and agencies
    18,317       2,456       765       -       21,538  
U.S. government and agencies
    3,184       448       -       -       3,632  
Municipals and money markets
    500       4,679       966       -       6,145  
Commodities and related contracts
    -       693       -       -       693  
                                         
Total trading assets, excluding derivative contracts
    38,863       30,075       20,925       -       89,863  
                                         
Derivative contracts
    5,979       820,966       21,119       (789,874 )     58,190  
Investment securities trading:
                                       
Equities
    -       17       -       -       17  
Mortgages, mortgage-backed and asset-backed
    -       -       23       -       23  
Corporate debt
    -       113       40       -       153  
Non-U.S. governments and agencies
    -       430       247       -       677  
Municipals and money markets
    345       361       -       -       706  
                                         
Total investment securities trading
    345       921       310       -       1,576  
                                         
Investment securities available-for-sale:
                                       
Mortgage-backed securities — agency collateralized
    -       9,818       -       -       9,818  
mortgage obligations
                                       
Mortgage-backed securities — non-agency MBSs
    -       1,559       796       -       2,355  
Corporate/agency bonds
    -       10       -       -       10  
Other taxable securities
    -       60       -       -       60  
                                         
Total investment securities available-for-sale
    -       11,447       796       -       12,243  
                                         
Investment securities non-qualifying
    1,945       837       3,262       -       6,044  
                                         
Total investment securities
    2,290       13,205       4,368       -       19,863  
                                         
Securities received as collateral
    14,849       375       -       -       15,224  
Loans, notes and mortgages
    -       761       4,074       -       4,835  


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Table of Contents

 
                                         
    Fair Value Measurements on a Recurring Basis
    Successor Company as of September 30, 2009
                Netting
   
(dollars in millions)   Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Liabilities:
                                       
Payables under repurchase agreements
  $ -     $ 49,501     $ -     $ -     $ 49,501  
Short-term borrowings
    -       568       -       -       568  
Trading liabilities, excluding derivative contracts:
                                       
Equities
    11,469       1,092       -       -       12,561  
Convertible debentures
    -       154       -       -       154  
Corporate debt
    -       1,622       -       -       1,622  
Non-U.S. governments and agencies
    18,990       525       391       -       19,906  
U.S. government and agencies
    1,391       173       -       -       1,564  
Municipals, money markets and other
    407       560       -               967  
                                         
Total trading liabilities, excluding derivative contracts
    32,257       4,126       391       -       36,774  
                                         
Derivative contracts
    5,497       823,251       15,316       (802,624 )     41,440  
Obligation to return securities received as collateral
    14,849       375       -       -       15,224  
Other payables — interest and other
    -       46       241       -       287  
Long-term borrowings
    -       43,769       5,078       -       48,847  
 
 
 
(1) Represents counterparty and cash collateral netting.
(2) Primarily represents auction rate securities.
 
Level 3 derivative contracts (assets) primarily relate to derivative positions on U.S. ABS CDOs and other mortgages of $5.7 billion, $9.6 billion of other credit derivatives that incorporate unobservable correlation, and $5.8 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have an unobservable model valuation input(s).
 
Level 3 non-qualifying investment securities primarily relate to private equity and principal investment positions.
 
Level 3 loans, notes and mortgages primarily relate to mortgage and corporate loans.
 
Level 3 derivative contracts (liabilities) primarily relate to derivative positions on U.S. ABS CDOs and other mortgages of $4.0 billion, $6.3 billion of other credit derivatives that incorporate unobservable correlation, and $5.0 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have unobservable correlation.
 
Level 3 long-term borrowings primarily relate to equity-linked structured notes of $4.1 billion that are long-dated and/or have unobservable correlation.
 

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Table of Contents

 
                                         
(dollars in millions)
    Fair Value Measurements on a Recurring Basis
    Predecessor Company as of December 26, 2008
                Netting
   
    Level 1   Level 2   Level 3   Adj(1)   Total
 
 
Assets:
                                       
Securities segregated for regulatory purposes or deposited with clearing organizations
  $ 1,421     $ 10,156     $ -     $ -     $ 11,577  
Receivables under resale agreements
    -       62,146       -       -       62,146  
Receivables under securities borrowed transactions
    -       853       -       -       853  
Trading assets, excluding derivative contracts
    30,106       33,902       22,120       -       86,128  
Derivative contracts
    8,538       1,239,225       37,325       (1,195,611 )     89,477  
Investment securities
    2,280       29,254       3,279       -       34,813  
Securities received as collateral
    9,430       2,228       -       -       11,658  
Loans, notes and mortgages
    -       690       359       -       1,049  
Other assets(2)
    -       8,046       -       -       8,046  
Liabilities:
                                       
Payables under repurchase agreements
    -       32,910       -       -       32,910  
Short-term borrowings
    -       3,387       -       -       3,387  
Trading liabilities, excluding derivative contracts
    14,098       4,010       -       -       18,108  
Derivative contracts
    8,438       1,254,158       35,018       (1,226,251 )     71,363  
Obligation to return securities received as collateral
    9,430       2,228       -       -       11,658  
Other payables — interest and other(2)
    10       741       -       (79 )     672  
Long-term borrowings(3)
    -       41,575       7,480       -       49,055  
 
 
(1) Represents counterparty and cash collateral netting.
(2) Primarily represents certain derivatives used for non-trading purposes.
(3) Includes bifurcated embedded derivatives carried at fair value.
 
Level 3 trading assets primarily include U.S. ABS CDOs of $9.4 billion, corporate bonds and loans of $5.0 billion and auction rate securities of $3.9 billion.
 
Level 3 derivative contracts (assets) primarily relate to derivative positions on U.S. ABS CDOs of $5.8 billion, $23.6 billion of other credit derivatives that incorporate unobservable correlation, and $7.9 billion of equity, currency, interest rate and commodity derivatives that are long-dated and/or have unobservable correlation.
 
Level 3 investment securities primarily relate to certain private equity and principal investment positions of $2.6 billion.
 
Level 3 derivative contracts (liabilities) primarily relate to derivative positions on U.S. ABS CDOs of $6.1 billion, $22.3 billion of other credit derivatives that incorporate unobservable correlation, and $4.8 billion of equity derivatives that are long-dated and/or have unobservable correlation.
 
Level 3 long-term borrowings primarily relate to structured notes with embedded equity derivatives of $6.3 billion that are long-dated and/or have unobservable correlation.
 

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Table of Contents

 
                                                                         
(dollars in millions)
    Level 3 Financial Assets and Liabilities
    Successor Company
    Three Months Ended September 30, 2009
        Total Realized and Unrealized Gains or (Losses)
  Total Realized and
      Purchases,
       
        included in Income   Unrealized Gains
  Unrealized
  Issuances
       
    Beginning
  Principal
  Other
      or (Losses)
  Losses to
  and
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   included in Income   OCI   Settlements   in (out)   Balance
 
 
Assets:
                                                                       
Trading assets, excluding derivative contracts:
                                                                       
Equities
  $ 330     $ (36 )   $ -     $ -     $ (36 )   $ -     $ 3     $ 2     $ 299  
Mortgages, mortgage-backed and asset-backed
    7,176       17       -       -       17       -       (3,177 )     8       4,024  
Corporate debt
    4,004       542       -       -       542       -       3,696       554       8,796  
Preferred stock
    6,591       37       -       -       37       -       (553 )     -       6,075  
Non-U.S. governments and agencies
    691       61       -       -       61       -       -       13       765  
Municipals and money markets
    931       6       -       -       6       -       29       -       966  
                                                                         
Total trading assets, excluding derivative contracts
    19,723       627       -       -       627       -       (2 )     577       20,925  
                                                                         
Derivative contracts, net
    6,248       (1,356 )     -       -       (1,356 )     -       (136 )     1,047       5,803  
Investment securities trading:
                                                                    -  
Mortgages, mortgage-backed and asset-backed
    38       3       -       -       3       -       (18 )     -       23  
Corporate debt
    -       -       -       -       -       -       -       40       40  
Non-U.S. governments and agencies
    174       -       -       -       -       -       -       73       247  
                                                                         
Total investment securities trading
    212       3       -       -       3       -       (18 )     113       310  
                                                                         
Investment securities available-for-sale:
                                                                       
Mortgage-backed securities — non-agency MBSs
    3,227       -       (158 )     -       (158 )     (602 )     (1,691 )     20       796  
                                                                         
Total investment securities available-for-sale
    3,227       -       (158 )     -       (158 )     (602 )     (1,691 )     20       796  
                                                                         
Investment securities non-qualifying
    2,832       -       420       -       420       -       (37 )     47       3,262  
                                                                         
Total investment securities
    6,271       3       262       -       265       (602 )     (1,746 )     180       4,368  
                                                                         
Loans, notes and mortgages
    6,085       -       (59 )     53       (6 )     -       (2,052 )     47       4,074  
Liabilities:
                                                                       
Trading liabilities, excluding derivative contracts:
                                                                       
Non-U.S. governments and agencies
    352       (39 )     -       -       (39 )     -       -       -       391  
                                                                         
Total trading liabilities, excluding derivative contracts
    352       (39 )     -       -       (39 )     -       -       -       391  
                                                                         
Other liabilities — interest and other
    628       -       47       -       47       -       (340 )     -       241  
Long-term borrowings
    5,289       (468 )     (93 )     -       (561 )     -       (371 )     (401 )     5,078  
 
 
 
Net losses in principal transactions related to net derivative contracts were primarily due to the narrowing of credit spreads, primarily related to monoline hedges of mortgage-related positions.
 
Decreases in purchases, issuances and settlements related to mortgages, mortgage-backed and asset-backed securities are primarily due to the reclassification of certain positions to corporate debt during the third quarter of 2009. Increases in purchases, issuances and settlements related to corporate debt primarily relates to the reclassification of certain positions from mortgages, mortgage-backed and asset-backed securities during the third quarter of 2009 in addition to the recording of assets for which the exposure was previously recognized as a derivative contract (total return swap). Decreases in purchases, issuances and settlements related to available-for-sale mortgage-backed securities — non-agency primarily relates to the sale of certain positions. Decreases in purchases, issuances and settlements related to loans, notes and mortgages were due to the sale of certain held for investment loans associated with the sale of Merrill Lynch Bank USA (“MLBUSA”) to Bank of America during the third quarter of 2009. See Note 21.
 
Net transfers in for net derivative contracts is primarily due to an increase in the impact of credit valuation adjustments in relation to the overall pricing of certain corporate bespoke CDO positions.
 

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(dollars in millions)
    Level 3 Financial Assets and Liabilities
    Successor Company
    Nine Months Ended September 30, 2009
        Total Realized and Unrealized Gains or (Losses)
  Total Realized and
      Purchases,
       
        included in Income   Unrealized Gains
  Unrealized
  Issuances
       
    Beginning
  Principal
  Other
      or (Losses)
  Gains to
  and
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   included in Income   OCI   Settlements   in (out)   Balance
 
 
Assets:
                                                                       
Trading assets, excluding derivative contracts:
                                                                       
Equities
  $ 231     $ (58 )   $ -     $ -     $ (58 )   $ -     $ 175     $ (49 )   $ 299  
Mortgages, mortgage-backed and asset-backed
    7,568       (315 )     -       -       (315 )     -       (809 )     (2,420 )     4,024  
Corporate debt
    10,149       312       -       -       312       -       2,209       (3,874 )     8,796  
Preferred stock
    3,344       (153 )     -       -       (153 )     -       2,779       105       6,075  
Non-U.S. governments and agencies
    30       125       -       -       125       -       10       600       765  
Municipals and money markets
    798       6       -       -       6       -       175       (13 )     966  
                                                                         
Total trading assets, excluding derivative contracts
    22,120       (83 )     -       -       (83 )     -       4,539       (5,651 )     20,925  
                                                                         
Derivative contracts, net
    2,307       (1,263 )     -       -       (1,263 )     -       (56 )     4,815       5,803  
Investment securities trading:
                                                                       
Mortgages, mortgage-backed and asset-backed
    22       (7 )     -       -       (7 )     -       (22 )     30       23  
Corporate debt
    146       (9 )     -       -       (9 )     -       -       (97 )     40  
Non-U.S. governments and agencies
    -       -       -       -       -       -       -       247       247  
                                                                         
Total investment securities trading
    168       (16 )     -       -       (16 )     -       (22 )     180       310  
                                                                         
Investment securities available-for-sale:
                                                                       
Mortgage-backed securities -non- agency MBSs
    350       -       (432 )     178       (254 )     709       (2,201 )     2,192       796  
                                                                         
Total investment securities available-for-sale
    350       -       (432 )     178       (254 )     709       (2,201 )     2,192       796  
                                                                         
Investment securities non-qualifying
    2,761       -       568       -       568       -       (60 )     (7 )     3,262  
                                                                         
Total investment securities
    3,279       (16 )     136       178       298       709       (2,283 )     2,365       4,368  
                                                                         
Loans, notes and mortgages
    359       -       450       53       503       -       (2,646 )     5,858       4,074  
Liabilities:
                                                                       
Trading liabilities, excluding derivative contracts:
                                                                       
Non-U.S. governments and agencies
    -       (43 )     -       -       (43 )     -       -       348       391  
                                                                         
Total trading liabilities, excluding derivative contracts
    -       (43 )     -       -       (43 )     -       -       348       391  
                                                                         
Other liabilities — interest and other
    -       -       717       -       717       -       (340 )     1,298       241  
Long-term borrowings
    7,480       (2,032 )     (133 )     -       (2,165 )     -       (338 )     (4,229 )     5,078  
 
 
 
Net losses in principal transactions related to net derivative contracts were primarily due to the narrowing of credit spreads during the third quarter of 2009, primarily related to monoline hedges of mortgage-related positions. Net losses in principal transactions related to long-term borrowings were primarily due to the narrowing of Merrill Lynch’s credit spreads on certain equity linked notes.
 
Increases in purchases, issuances and settlements related to corporate debt primarily relates to the reclassification of certain positions from mortgages, mortgage-backed and asset-backed securities during the third quarter of 2009 in addition to the recording of assets for which the exposure was previously recognized as a derivative contract (total return swap). Increases in purchases, issuances and settlements of preferred stock were primarily attributable to the purchase of auction rate securities in the first quarter of 2009. Decreases in purchases, issuances and settlements related to available-for-sale mortgage-backed securities — non agency primarily relates to the sale of certain positions. Decreases in purchases, issuances and settlements related to loans, notes and mortgages were due to the sale of certain held for investment loans associated with the sale of MLBUSA to Bank of America during the third quarter of 2009. See Note 21.
 
Net transfers out for mortgages, mortgage-backed and asset-backed securities primarily relates to increased price transparency (e.g. trading activity and external vendor quotes) for certain

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U.S. ABS CDO underlying collateral types. Net transfers out for corporate debt primarily relates to the reclassification in the first quarter of 2009 of certain loans from trading assets to loans, notes and mortgages held for investment, which are not measured at fair value. Net transfers in for net derivative contracts primarily relates to decreased price observability for certain underlying U.S. ABS CDOs and other mortgage positions. Net transfers in for available-for-sale mortgage-backed securities — non agency is the result of changes in price transparency. Net transfers in for loans, notes and mortgages relates to the fair value option election by Merrill Lynch for certain mortgage, corporate and leveraged loans as a result of its acquisition by Bank of America. Net transfers in for other payables — interest and other relates to the fair value option election by Merrill Lynch for certain loan commitments as a result of its acquisition by Bank of America. Net transfers out for long-term borrowings were primarily due to decreases in the significance of unobservable pricing inputs for certain equity linked notes.
 
                                                                 
(dollars in millions)
    Level 3 Financial Assets and Liabilities
    Predecessor Company
    Three Months Ended September 26, 2008
        Total Realized and Unrealized Gains
  Total Realized and
  Purchases,
       
        or (Losses) included in Income   Unrealized Gains
  Issuances
       
    Beginning
  Principal
  Other
      or (Losses)
  and
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   included in Income   Settlements   in (out)   Balance
 
 
Assets:
                                                               
Securities segregated for regulatory purposes or deposited with clearing organizations
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Trading assets
    20,190       303       -       5       308       (3,374 )     699       17,823  
Derivative contracts, net
    (1,292 )     (8,792 )     -       -       (8,792 )     13,348       436       3,700  
Investment securities
    4,589       (147 )     (304 )     -       (451 )     61       3       4,202  
Loans, notes and mortgages
    172       (6 )     (18 )     1       (23 )     557       15       721  
Liabilities:
                                                               
Trading liabilities
    -       1       -       -       1       -       29       28  
Short-term borrowings
    34       -       -       -       -       (19 )     -       15  
Long-term borrowings
    12,749       3,788       271       -       4,059       (30 )     2,875       11,535  
 
 
 
                                                                 
(dollars in millions)
    Level 3 Financial Assets and Liabilities
    Predecessor Company
    Nine Months Ended September 26, 2008
                    Total Realized and
  Purchases,
       
        Total Realized and Unrealized Gains or (Losses) included in Income   Unrealized Gains
  Issuances
       
    Beginning
  Principal
  Other
      or (Losses)
  and
  Transfers
  Ending
    Balance   Transactions   Revenue   Interest   included in Income   Settlements   in (out)   Balance
 
 
Assets:
                                                               
Securities segregated for regulatory purposes or deposited with clearing organizations
  $ 84     $ -     $ -     $ 1     $ 1     $ (79 )   $ (6 )   $ -  
Trading assets
    9,773       (2,744 )     -       86       (2,658 )     7,025       3,683       17,823  
Derivative contracts, net
    (9,069 )     (9,849 )     -       5       (9,844 )     25,467       (2,854 )     3,700  
Investment securities
    5,491       (895 )     (291 )     -       (1,186 )     159       (262 )     4,202  
Loans, notes and mortgages
    63       (6 )     (19 )     (2 )     (27 )     676       9       721  
Liabilities:
                                                               
Trading liabilities
    -       1       -       -       1       -       29       28  
Short-term borrowings
    -       -       -       -       -       15       -       15  
Long-term borrowings
    4,765       2,171       285       -       2,456       1,435       7,791       11,535  
 
 


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The following tables provide the portion of gains or losses included in income for the three and nine months ended September 30, 2009 and September 26, 2008 attributable to unrealized gains or losses relating to those Level 3 assets and liabilities held at September 30, 2009 and September 26, 2008, respectively.
 
                                                                 
(dollars in millions)
    Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
    Successor Company
    Three Months Ended Sept. 30, 2009   Nine Months Ended Sept. 30, 2009
    Principal
  Other
          Principal
  Other
       
    Transactions   Revenue   Interest   Total   Transactions   Revenue   Interest   Total
 
 
Assets:
                                                               
Trading assets, excluding derivative contracts:
                                                               
Equities
  $ (36 )   $ -     $      -     $ (36 )   $ (58 )   $ -     $ -     $ (58 )
Mortgages, mortgage-backed and asset-backed
    99       -       -       99       (238 )     -       -       (238 )
Corporate debt
    409       -       -       409       162       -       -       162  
Preferred stock
    37       -       -       37       (153 )     -       -       (153 )
Non-U.S. governments and agencies
    61       -       -       61       125       -       -       125  
Municipals and money markets
    6       -       -       6       7       -       -       7  
                                                                 
Total trading assets, excluding derivative contracts
    576       -       -       576       (155 )     -       -       (155 )
                                                                 
Derivative contracts, net
    (1,365 )     -       -       (1,365 )     (1,281 )     -       -       (1,281 )
Investment securities trading:
                                                               
Mortgages, mortgage-backed and asset-backed
    2       -       -       2       (9 )     -       -       (9 )
Corporate debt
    -       -       -       -       (9 )     -       -       (9 )
Non-U.S. governments and agencies
    -       -       -       -       -       -       -       -  
                                                                 
Total investment securities trading
    2       -       -       2       (18 )     -       -       (18 )
                                                                 
Investment securities available-for-sale:
                                                               
Mortgage-backed securities — non-agency MBSs
    -       (177 )     -       (177 )     -       (241 )     178       (63 )
                                                                 
                                                                 
Total investment securities available-for-sale
    -       (177 )     -       (177 )     -       (241 )     178       (63 )
                                                                 
Investment securities non-qualifying
    -       438       -       438       -       586       -       586  
                                                                 
Total investment securities
    2       261       -       263       (18 )     345       178       505  
                                                                 
Loans, notes and mortgages
    -       46       -       46       -       555       -       555  
Liabilities:
                                                               
Trading liabilities, excluding derivative contracts:
                                                               
Non-U.S. governments and agencies
    (39 )     -       -       (39 )     (43 )     -       -       (43 )
                                                                 
Total trading liabilities, excluding derivative contracts
    (39 )     -       -       (39 )     (43 )     -       -       (43 )
                                                                 
Other liabilities — interest and other
    -       47       -       47       -       717       -       717  
Long-term borrowings
    (484 )     (93 )     -       (577 )     (2,266 )     (133 )     -       (2,399 )
 
 
 
Net losses in principal transactions related to net derivative contracts were primarily due to the narrowing of credit spreads, primarily related to monoline hedges of mortgage-related positions. Net losses in principal transactions related to long-term borrowings were primarily due to the narrowing of Merrill Lynch’s credit spreads on certain equity linked notes.
 


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(dollars in millions)
    Unrealized Gains or (Losses) for Level 3 Assets and Liabilities Still Held
    Predecessor Company
    Three Months Ended September 26, 2008   Nine Months Ended September 26, 2008
    Principal
  Other
          Principal
  Other
       
    Transactions   Revenue   Interest   Total   Transactions   Revenue   Interest   Total
 
 
Assets:
                                                               
Securities segregated for regulatory purposes or deposited with clearing organizations
  $ -     $ -     $ -     $ -     $ -     $ -     $ 1     $ 1  
Trading assets
    293       -       (29 )     264       (2,753 )     -       74       (2,679 )
Derivative contracts, net
    (3,979 )     -       -       (3,979 )     2,611       -       5       2,616  
Investment securities
    (102 )     (304 )     -       (406 )     (822 )     (295 )     -       (1,117 )
Loans, notes, and mortgages
    (6 )     (15 )     1       (20 )     (6 )     (9 )     (2 )     (17 )
Liabilities:
                                                               
Long-term borrowings
    3,811       271       -       4,082       2,236       285       -       2,521  
 
 
 
Non-recurring Fair Value
 
Certain assets and liabilities are measured at fair value on a non-recurring basis and are not included in the tables above. These assets and liabilities primarily include loans and loan commitments held for sale and reported at lower of cost or fair value and loans held for investment that were initially measured at cost and have been written down to fair value as a result of an impairment. The following table shows the fair value hierarchy for those assets and liabilities measured at fair value on a non-recurring basis as of September 30, 2009 and December 26, 2008, respectively.
 
                                                 
(dollars in millions)
    Non-Recurring Basis   Gains/(Losses)   Gains/(Losses)
    Successor Company
  Three Months
  Nine Months
    as of September 30, 2009   Ended
  Ended
    Level 1   Level 2   Level 3   Total   Sept. 30, 2009   Sept. 30, 2009
 
 
Assets:
                                               
Loans, notes and mortgages
  $     -     $ 941     $ 2,865     $ 3,806     $ 111     $ 90  
Other assets
    -       -       135       135       (61 )     (121 )
Liabilities:
                                               
Other payables — interest and other
    -       -       56       56       (1 )     20  
 
 
 
                                 
(dollars in millions)
    Non-Recurring Basis
    Predecessor Company
    as of December 26, 2008
    Level 1   Level 2   Level 3   Total
 
 
Assets:
                               
Loans, notes, and mortgages
  $     -     $ 4,386     $ 6,727     $ 11,113  
Liabilities:
                               
Other payables — interest and other
    -       1,258       67       1,325  
 
 
 
Loans, notes, and mortgages includes held for sale loans that are carried at the lower of cost or fair value and for which the fair value was below the cost basis at September 30, 2009 and December 26, 2008, respectively. It also includes certain impaired held for investment loans where an allowance for loan losses has been calculated based upon the fair value of the loans or collateral. Level 3 assets as of

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September 30, 2009 primarily relate to residential and commercial real estate loans that are classified as held for sale where there continues to be significant illiquidity in the loan trading and securitization markets. Level 3 assets as of December 26, 2008 primarily related to U.K. and other European residential and commercial real estate loans that are classified as held for sale of $4.6 billion.
 
Other payables — interest and other include amounts recorded for loan commitments at lower of cost or fair value where the funded loan will be held for sale.
 
Fair Value Option Election
 
The fair value option election allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. The fair value option election is permitted on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. As discussed above, certain of Merrill Lynch’s financial instruments are required to be accounted for at fair value under Investment Accounting and Derivatives Accounting, as well as industry level guidance. For certain financial instruments that are not accounted for at fair value under other applicable accounting guidance, the fair value option election has been made.
 
The following tables provide information about where in the Condensed Consolidated Statements of Earnings/(Loss) changes in fair values of assets and liabilities, for which the fair value option election has been made, are included for the three and nine months ended September 30, 2009 and September 26, 2008, respectively.
 
                                                 
(dollars in millions)
    Successor Company
    Changes in Fair Value for Items Measured at Fair Value Pursuant to the Fair Value Option Election
    For the Three Months Ended
  For the Nine Months Ended
    September 30, 2009   September 30, 2009
    Gains/
  Gains/
  Total
  Gains/
  Gains/
  Total
    (losses)
  (losses)
  Changes
  (losses)
  (losses)
  Changes
    Principal
  Other
  in Fair
  Principal
  Other
  in Fair
    Transactions   Revenues   Value   Transactions   Revenues   Value
 
 
Assets:
                                               
Receivables under resale agreements
  $ (9 )   $ -     $ (9 )   $ (330 )   $ -     $ (330 )
Investment securities
    -       (13 )     (13 )     379       (148 )     231  
Loans, notes and mortgages
    -       (37 )     (37 )     -       601       601  
Liabilities:
                                               
Payables under repurchase agreements
    2       -       2       186       -       186  
Short-term borrowings
    20       -       20       (226 )     6       (220 )
Other payables — interest and other
    -       48       48       -       729       729  
Long-term borrowings(1)
    (3,438 )     11       (3,427 )     (7,195 )     (29 )     (7,224 )
 
 
(1) Other revenues primarily represent fair value changes on non-recourse long-term borrowings issued by consolidated SPEs.


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(dollars in millions)
    Predecessor Company
    Changes in Fair Value for Items Measured at Fair Value Pursuant to the Fair Value Option Election
    For the Three Months Ended
  For the Nine Months Ended
    September 26, 2008   September 26, 2008
    Gains/
  Gains/
  Total
  Gains/
  Gains/
  Total
    (losses)
  (losses)
  Changes
  (losses)
  (losses)
  Changes
    Principal
  Other
  in Fair
  Principal
  Other
  in Fair
    Transactions   Revenues   Value   Transactions   Revenues   Value
 
 
Assets:
                                               
Receivables under resale agreements
  $ 139     $ -     $ 139     $ (70 )   $ -     $ (70 )
Investment securities
    (588 )     (212 )     (800 )     (671 )     (251 )     (922 )
Loans, notes and mortgages
    (40 )     -       (40 )     (37 )     12       (25 )
Liabilities:
                                               
Payables under repurchase agreements
    (100 )     -       (100 )     (52 )     -       (52 )
Short-term borrowings
    (367 )     -       (367 )     (185 )     -       (185 )
Long-term borrowings(1)
    8,632       846       9,478       12,578       1,715       14,293  
 
 
(1) Other revenues primarily represent fair value changes on non-recourse long-term borrowings issued by consolidated SPEs.
 
The following describes the rationale for electing to account for certain financial assets and liabilities at fair value, as well as the impact of instrument-specific credit risk on the fair value.
 
Resale and repurchase agreements:
 
Merrill Lynch made the fair value option election for certain resale and repurchase agreements. The fair value option election was made based on the tenor of the resale and repurchase agreements, which reflects the magnitude of the interest rate risk. The majority of resale and repurchase agreements collateralized by U.S. government securities were excluded from the fair value option election as these contracts are generally short-dated and therefore the interest rate risk is not considered significant. Amounts loaned under resale agreements require collateral with a market value equal to or in excess of the principal amount loaned resulting in minimal credit risk for such transactions.
 
Loans, notes and mortgages and loan commitments:
 
Merrill Lynch made the fair value option election for automobile and certain corporate loans because the loans are risk managed on a fair value basis. Upon the acquisition of Merrill Lynch by Bank of America, Merrill Lynch also made the fair value option election for certain mortgage, corporate, and leveraged loans and loan commitments. The change in the fair value of loans, notes and mortgages and loan commitments for which the fair value option election was made that was attributable to changes in borrower-specific credit risk were gains of $70 million for the three months ended September 30, 2009 and gains of $320 million for the nine months ended September 30, 2009. The change in the fair value of loans, notes and mortgages for which the fair value option election was made that was attributable to changes in borrower-specific credit risk was not material for the three and nine months ended September 26, 2008.
 
For those loans, notes and mortgages for which the fair value option election has been made, the aggregate fair value of loans that are 90 days or more past due and in non-accrual status is not material to the Condensed Consolidated Financial Statements.


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Short-term and long-term borrowings:
 
Merrill Lynch made the fair value option election for certain short-term and long-term borrowings that are risk managed on a fair value basis, including structured notes, and for which hedge accounting under Derivatives Accounting had been difficult to obtain. The majority of the fair value changes on long-term borrowings is from structured notes with coupon or repayment terms that are linked to the performance of debt and equity securities, indices, currencies or commodities. Excluding losses for the three and nine months ended September 30, 2009 and gains for the three and nine months ended September 26, 2008 related to changes in Merrill Lynch’s credit spreads, the majority of (losses)/gains for the respective periods are offset by gains/(losses) on derivatives that economically hedge these borrowings and that are accounted for at fair value under Derivatives Accounting. The changes in the fair value of liabilities for which the fair value option election was made that were attributable to changes in Merrill Lynch credit spreads were losses of approximately $2.1 billion and $3.5 billion for the three and nine months ended September 30, 2009 and gains of $2.8 billion and $5.0 billion for the three and nine months ended September 26, 2008. Changes in Merrill Lynch specific credit risk are derived by isolating fair value changes due to changes in Merrill Lynch’s credit spreads as observed in the secondary cash market.
 
The fair value option election was also made for certain non-recourse long-term borrowings issued by consolidated SPEs. The fair value of these long-term borrowings is unaffected by changes in Merrill Lynch’s creditworthiness.
 
The following tables present the difference between fair values and the aggregate contractual principal amounts of receivables under resale agreements, loans, notes, and mortgages and long-term borrowings for which the fair value option election has been made as of September 30, 2009 and December 26, 2008, respectively.
 
                         
(dollars in millions)
    Successor Company
        Principal
   
    Fair Value
  Amount
   
    at
  Due Upon
   
    September 30, 2009   Maturity   Difference
 
 
Assets:
                       
Receivables under resale agreements
  $ 52,436     $ 52,083     $ 353  
Loans, notes and mortgages
    4,765       9,127       (4,362 )
Liabilities:
                       
Long-term borrowings(1)
    48,847       55,604       (6,757 )
 
 
(1) The majority of the difference relates to the impact of the widening of Merrill Lynch’s credit spreads, the change in fair value of non-recourse debt, and zero coupon notes issued at a substantial discount from the principal amount.
 


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(dollars in millions)
    Predecessor Company
        Principal
   
    Fair Value
  Amount
   
    at
  Due Upon
   
    December 26, 2008   Maturity   Difference
 
 
Assets:
                       
Receivables under resale agreements
  $ 62,146     $ 61,466     $ 680  
Receivables under securities borrowed transactions
    853       853       -  
Loans, notes and mortgages
    979       1,326       (347 )
Liabilities:
                       
Long-term borrowings(1)
    49,521       62,244       (12,723 )
 
 
(1) The majority of the difference relates to the impact of the widening of Merrill Lynch’s credit spreads, the change in fair value of non-recourse debt, and zero coupon notes issued at a substantial discount from the principal amount.
 
Concentration of risk to the mortgage markets
 
At September 30, 2009, Merrill Lynch had sizeable exposure to the mortgage market through securities, derivatives, loans and loan commitments. This exposure primarily related to:
 
•  Net exposures of $33.3 billion in U.S. Prime residential mortgage-related positions and $2.6 billion in other residential mortgage-related positions, excluding Merrill Lynch’s investment securities portfolio; and
 
•  Net exposure of $5.9 billion in commercial real estate related positions, excluding First Republic, and $5.3 billion in First Republic commercial real estate related positions.
 
In September 2008, Merrill Lynch sold $30.6 billion gross notional amount of U.S. super senior ABS CDOs (the “Portfolio”) to an affiliate of Lone Star Funds for a sales price of $6.7 billion. In connection with this sale, Merrill Lynch provided financing 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 had a carrying value of $4.5 billion at September 30, 2009. 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.
 
Valuation of these exposures will continue to be impacted by external market factors including default rates, rating agency actions, and the prices at which observable market transactions occur. Merrill Lynch’s ability to mitigate its risk by selling or hedging its exposures is also limited by the market environment.
 
Concentration of risk to financial guarantors
 
To economically hedge certain ABS CDO and U.S. sub-prime mortgage positions, Merrill Lynch entered into credit derivatives with various counterparties, including monolines and other financial guarantors. At September 30, 2009, the carrying value of our hedges with financial guarantors related to U.S. super senior ABS CDOs was $1.0 billion.

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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 Collateralized Debt Obligations (“CDOs”), Collateralized Loan Obligations (“CLOs”), Residential Mortgage-Backed Securities (“RMBS”) and Commercial Mortgage-Backed Securities (“CMBS”). At September 30, 2009, the carrying value of our hedges with financial guarantors related to these types of exposures was $4.2 billion.
 
 
Disclosure is required on an interim and annual basis of the estimated fair value of financial instruments, including those financial instruments for which Merrill Lynch did not make the fair value option election. The fair values of such instruments have been derived, in part, by management’s assumptions, the estimated amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimated fair values. Accordingly, the net realizable values could be materially different from the estimates presented below. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of Merrill Lynch.
 
Disclosure of the fair value of lease financing arrangements and nonfinancial instruments, including goodwill and intangible assets, is not required.
 
The following disclosures represent financial instruments for which the ending balances at September 30, 2009 are not carried at fair value in their entirety on Merrill Lynch’s Condensed Consolidated Balance Sheets.
 
Short-term Financial Instruments
 
The carrying value of short-term financial instruments, including cash and cash equivalents, certain securities financing transactions, customer and broker-dealer receivables and payables, and commercial paper and other short-term borrowings, approximates the fair value of these instruments. These financial instruments generally expose Merrill Lynch to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market. Merrill Lynch applied the fair value option election for certain securities financing transactions.
 
Loans, Notes and Mortgages
 
Fair values were generally determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value. Merrill Lynch estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan. Merrill Lynch made the fair value option election for certain loans and loan commitments. See Note 4 for additional information on loans for which Merrill Lynch made the fair value option election.
 
Deposits
 
The fair value for certain deposits with stated maturities was calculated by discounting contractual cash flows using current market rates for instruments with similar maturities. For deposits with no stated maturities, the carrying amount was considered to approximate fair value and does not take into


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account the significant value of the cost advantage and stability of Merrill Lynch’s long-term relationships with depositors.
 
Long-term Borrowings
 
Merrill Lynch uses quoted market prices for its long-term borrowings when available. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar maturities. Merrill Lynch made the fair value option election for certain long-term borrowings, including structured notes, for which hedge accounting had been difficult to obtain. See Note 4 for additional information.
 
The book and fair values of certain financial instruments at September 30, 2009 were as follows:
 
                 
(dollars in millions)
    Successor Company
    September 30, 2009
    Book Value   Fair Value
 
 
Financial assets
               
Loans, notes and mortgages(1)
  $ 67,729     $ 66,301  
Financial liabilities
               
Deposits
    47,819       47,872  
Long-term borrowings(2)
    164,990       171,061  
 
 
(1) Loans are presented net of allowance for loan losses and exclude leases. The fair value is determined based on the present value of future cash flows using credit spreads or risk adjusted rates of return that a buyer of the portfolio would require. Merrill Lynch expects to collect the principal cash flows underlying the book values as well as the related interest cash flows.
(2) Includes junior subordinated notes (related to trust preferred securities).
 
 
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, or option contracts, or 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).
 
Derivatives Accounting establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (“embedded derivatives”) and for hedging activities. Derivatives Accounting requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. The fair value of all derivatives is recorded on a net-by-counterparty basis on the Condensed Consolidated Balance Sheets where management believes a legal right of setoff exists under an enforceable netting agreement. All derivatives, including bifurcated embedded derivatives within structured notes, are reported on the Condensed Consolidated Balance Sheets as trading assets and liabilities.
 
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 Derivatives Accounting.


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Trading derivatives
 
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. Changes in fair value for these derivatives are reported in current period earnings as principal transactions revenues.
 
Non-trading derivatives
 
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’s debt was issued in a variety of maturities and currencies to achieve the lowest cost financing possible. 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 payments;
 
  •  Change the underlying interest rate basis or reset frequency; and
 
  •  Change the settlement currency of a debt instrument.
 
Changes in the fair value of interest rate derivatives are reported in interest expense when hedge accounting is applied; otherwise changes in fair value are reported in other revenue. Changes in the fair value of foreign currency derivatives are reported in other revenue.
 
2.  Merrill Lynch uses foreign-exchange forward contracts, foreign-exchange options, and currency swaps to hedge its net investments in foreign operations, as well as other foreign currency exposures (e.g., non-U.S. dollar denominated debt and expenses). These derivatives are used to mitigate the impact of changes in exchange rates. Changes in the fair value of these derivatives are reported in other revenue, unless net investment hedge accounting is applied.
 
3.  Merrill Lynch enters into futures, swaps, options and forward contracts to manage the price risk of certain commodity inventory and forecasted commodity purchases and sales. Changes in fair value of these derivatives are reported in principal transaction revenues, unless cash flow hedge accounting is applied.
 
4.  Merrill Lynch enters into credit default swaps to manage the credit risk on certain loans that are not part of trading activities. Changes in the fair value of these derivatives are reported in other revenue.
 
Derivatives that qualify as accounting hedges under the guidance in Derivatives Accounting 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 liability that is attributable to the hedged risk, are recorded in current period earnings as interest expense. Changes in the fair value of derivatives that are designated and qualify as fair value hedges of commodity price risk, along with the gain or loss on the hedged asset that is attributable to the hedged risk, are recorded in current period earnings in principal transactions.


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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 OCI until earnings are affected by the variability of cash flows of the hedged asset or liability. For commodity hedges, the amount is reclassified out of OCI and recorded in principal transactions when the forecasted purchase or sale of the commodity occurs.
 
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 OCI. Changes in the fair value of the hedge instruments that are associated with the difference between the spot rate and the contracted forward 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. Merrill Lynch uses regression analysis at the hedge’s inception and for each reporting period thereafter to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. When assessing hedge effectiveness on interest rate hedges and fair value hedges of commodity price risk, there are no attributes of the derivatives used to hedge the fair value exposure that are excluded from the assessment. For cash flow hedges of commodity price risk, 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. When it is determined that a derivative is not highly effective as a hedge, Merrill Lynch discontinues hedge accounting.
 
Hedge accounting activity for the three and nine months ended September 30, 2009 included the following:
 
Fair value hedges of interest rate risk on long-term borrowings
 
                     
(dollars in millions)
        Three Months Ended
  Nine Months Ended
    Account location   September 30, 2009   September 30, 2009
 
 
Gain/(loss) recognized in income on the derivative
  Interest expense   $ 944     $ (1,581 )
Gain/(loss) recognized in income on the long-term borrowing
  Interest expense   $ (1,156 )   $ 981  
Gain/(loss) recognized in income due to hedge ineffectiveness
  Interest expense   $ (212 )   $ (600 )
Carrying value of hedging derivatives as of September 30, 2009
                   
    Trading assets   $ 4,678     $ 4,678  
    Trading liabilities   $ 60     $ 60  
Notional amount of hedging derivatives as of September 30, 2009
                   
in an asset position
      $ 59,845     $ 59,845  
in a liability position
      $ 2,480     $ 2,480  
 
 


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Fair value hedges of commodity price risk on commodity inventory
 
                     
(dollars in millions)
        Three Months Ended
  Nine Months Ended
    Account location   September 30, 2009   September 30, 2009
 
 
Gain/(loss) recognized in income on the derivative
  Principal transactions   $ 3     $ 63  
Gain/(loss) recognized in income on the commodity inventory
  Principal transactions   $ (2 )   $ (59 )
Gain/(loss) recognized in income due to hedge ineffectiveness
  Principal transactions   $ 1     $ 4  
Carrying value of hedging derivatives as of September 30, 2009
                   
    Trading assets   $ 57     $ 57  
    Trading liabilities   $ 6     $ 6  
Notional amount of hedging derivatives as of September 30, 2009
                   
in an asset position
      $ 163     $ 163  
in a liability position
      $ 8     $ 8  
 
 
 
Cash flow hedges of commodity price risk on forecasted purchases and sales
 
                     
(dollars in millions)
        Three Months Ended
  Nine Months Ended
    Account location   September 30, 2009   September 30, 2009
 
 
Gain/(loss) on the derivative deferred in equity
  Accumulated other                
    comprehensive income   $ (4 )   $ 64  
Gain/(loss) reclassified into earnings in the current period
  Principal transactions   $ 53     $ 59  
Gain/(loss) recognized in income due to hedge ineffectiveness
  Principal transactions   $ (1 )   $ (1 )
Amount that is expected to be reclassified into earnings in the next 12 months as of September 30, 2009
  Principal transactions   $ 5     $ 5  
Carrying value of hedging derivatives as of September 30, 2009
                   
    Trading assets   $ 14     $ 14  
    Trading liabilities   $ 8     $ 8  
Notional amount of hedging derivatives as of September 30, 2009
                   
in an asset position
      $ 101     $ 101  
in a liability position
      $ 67     $ 67  
 
 


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Net investment hedges of foreign operations
 
                     
(dollars in millions)
        Three Months Ended
  Nine Months Ended
    Account location   September 30, 2009   September 30, 2009
 
 
Gain/(loss) on the derivative and non-derivative hedges deferred in equity
  Accumulated other                
    comprehensive income   $ (421 )   $ (1,682 )
Gain/(loss) recognized in income due to hedge ineffectiveness
  Other revenue   $ -     $ -  
Gain/(loss) recognized in income from the unused portion (time value) of the hedging derivative
  Other revenue   $ (6 )   $ (98 )
Carrying value of hedging derivatives as of September 30, 2009
  Trading assets   $ 362     $ 362  
    Trading liabilities   $ 398     $ 398  
Carrying value of non-derivative hedges as of September 30, 2009
  Long-term borrowings   $ 609     $ 609  
Notional amount of hedging derivatives as of September 30, 2009
                   
in an asset position
      $ 11,058     $ 11,058  
in a liability position
      $ 11,266     $ 11,266  
 
 
 
Gains/(losses) on non-trading derivatives not in hedge relationships
 
                     
(dollars in millions)
        Three Months Ended
  Nine Months Ended
    Account location   September 30, 2009   September 30, 2009
 
 
Interest rate risk
  Interest expense   $ 124     $ (594 )
Foreign currency risk
  Other revenue     1,944       484  
Credit risk
  Other revenue     (218 )     (370 )
 
 
 
The above amounts represent net gains/(losses) on derivatives that are not used for trading purposes and are not used in hedging relationships. Interest rate risk primarily relates to derivatives used to hedge long-term debt where hedge accounting is not applied and derivatives with third parties that are recorded by Merrill Lynch and utilized by Bank of America at the consolidated level for hedge accounting purposes. As the hedged item is not held by Merrill Lynch, hedge accounting is not applied by Merrill Lynch. Foreign currency risk primarily relates to economic hedges of foreign currency denominated transactions that generate earnings upon remeasurement in accordance with ASC 830-20 Foreign Currency Transactions (“Foreign Currency Transactions”). As both the remeasurement of the foreign currency risk on the transaction and the changes in fair value of the derivative are recorded in earnings, hedge accounting is not applied. Credit risk relates to credit default swaps used to economically manage the credit risk on certain loans not included in trading activities.


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Derivative balances by primary risk
 
Derivative instruments contain numerous market risks. In particular, most derivatives have interest rate risk, as they contain an element of financing risk which is affected by changes in interest rates. Additionally, derivatives expose Merrill Lynch to counterparty credit risk, although this is generally mitigated by collateral margining and netting arrangements. For disclosure purposes below, the primary risk of a derivative is largely determined by the business that is engaging in the derivative activity. For instance, a derivative that is initiated by an equities derivative desk will generally have equity price risk as its primary underlying market risk and is classified as such for the purposes of this disclosure, despite the fact that there may be other market risks that affect the value of the instrument.
 
The following table identifies the primary risk for derivative instruments at September 30, 2009. The primary risk is provided on a gross basis, prior to the application of the impact of counterparty and cash collateral netting.
 
                                 
(dollars in millions)
    Contract/
  Trading Assets-
  Contract/
  Trading Liabilities-
    Notional(1)   Derivative Contracts   Notional(1)   Derivative Contracts
 
 
Interest rate contracts
                               
Swaps
  $ 12,319,763     $ 582,168     $ 11,215,975     $ 571,174  
Futures and forwards
    1,635,948       3,050       1,651,469       3,335  
Written options
    -       -       1,398,659       51,393  
Purchased options
    1,214,564       51,208       -       -  
Foreign exchange contracts
                               
Swaps
    104,920       14,289       113,462       14,939  
Spot, futures and forwards
    315,051       13,314       292,323       11,935  
Written options
    -       -       292,876       12,760  
Purchased options
    304,853       12,821       -       -  
Equity contracts
                               
Swaps
    16,557       1,233       14,486       1,618  
Futures and forwards
    51,890       4,510       48,241       3,569  
Written options
    -       -       333,942       25,710  
Purchased options
    290,647       22,954       -       -  
Commodity contracts
                               
Swaps
    40,637       8,894       36,459       8,260  
Futures and forwards
    1,029,546       14,817       1,062,483       13,567  
Written options
    -       -       96,850       6,350  
Purchased options
    94,897       5,994       -       -  
Credit derivatives
                               
Purchased protection:
                               
Credit default swaps
    1,211,026       87,250       603,170       24,229  
Total return swaps
    2,534       352       2,092       372  
Other Credit Derivatives
    5,547       52       -       -  
Written protection:
                               
Credit default swaps
    599,394       23,274       1,318,012       90,273  
Total return swaps
    2,613       1,884       11,870       4,491  
Other Credit Derivatives
    -       -       5,267       89  
 
 
Gross derivative assets/liabilities
  $ 19,240,387     $ 848,064     $ 18,497,636     $ 844,064  
Less: Legally enforceable master netting
            (759,009 )             (759,009 )
 
 
Less: Cash collateral applied
            (30,865 )             (43,615 )
 
 
Total derivative assets and liabilities
          $ 58,190             $ 41,440  
 
 
(1) These amounts include trading derivatives, non-trading derivatives and bifurcated embedded derivatives.


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Trading revenues
 
Merrill Lynch enters into trading derivatives and non-derivative cash instruments to facilitate client transactions, for proprietary trading and financing purposes, and to manage risk exposures arising from trading assets and liabilities. The resulting risk from derivative and non-derivative cash instruments is managed on a portfolio basis as part of Merrill Lynch’s sales and trading activities and the related revenue is recorded on different income statement line items including principal transactions, commissions, other revenues and net interest profit/(loss). The following table identifies the amounts in the income statement line items attributable to trading and non-trading activities including both derivatives and non-derivative cash instruments categorized by primary risk for the three and nine months ended September 30, 2009.
 
Non-trading amounts relate to activities in connection with principal investment, wealth management, and certain lending activities; economic hedging activity discussed in the Non-trading derivatives section above, and the impact of changes in Merrill Lynch’s own creditworthiness on borrowings accounted for at fair value.
 
                                         
(dollars in millions)
For the Three Months
  Principal
      Other
  Net Interest
   
Ended Sept. 30, 2009   Transactions   Commissions   Revenues(1)   Profit/(Loss)   Total
 
 
Interest Rate Risk
  $ 321     $ 16     $ 5     $ 109     $ 451  
Foreign Exchange Risk
    8       -       -       18       26  
Equity Risk
    567       781       34       188       1,570  
Commodity Risk
    146       -       -       (36 )     110  
Credit Risk
    1,494       15       218       326       2,053  
                                         
Total trading — related
    2,536       812       257       605       4,210  
Non-trading related
    (2,322 )     504       1,095       (327 )     (1,050 )
                                         
Total
  $ 214     $ 1,316     $ 1,352     $ 278     $ 3,160  
                                         
 
 
 
                                         
(dollars in millions)
For the Nine Months
  Principal
      Other
  Net Interest
   
Ended Sept. 30, 2009   Transactions   Commissions   Revenues(1)   Profit/(Loss)   Total
 
 
Interest Rate Risk
  $ 1,435     $ 47     $ 17     $ 445     $ 1,944  
Foreign Exchange Risk
    271       -       1       12       284  
Equity Risk
    2,248       2,522       63       (378 )     4,455  
Commodity Risk
    762       -       -       (132 )     630  
Credit Risk
    3,445       45       441       1,071       5,002  
                                         
Total trading — related
    8,161       2,614       522       1,018       12,315  
Non-trading related
    (4,114 )     1,435       1,873       (344 )     (1,150 )
                                         
Total
  $ 4,047     $ 4,049     $ 2,395     $ 674     $ 11,165  
                                         
 
 
(1) Includes other income and other-than-temporary impairment losses on available-for-sale debt securities.
 
Derivatives as guarantees
 
Merrill Lynch enters into certain derivative contracts that meet the definition of a guarantee under ASC 460, Guarantees (“Guarantees Accounting”). Guarantees are defined to include derivative contracts that contingently require a guarantor to make payment to a guaranteed party based on


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changes in an underlying (such as changes in the value of interest rates, security prices, currency rates, commodity prices, indices, etc.), that relate to an asset, liability or equity security of a guaranteed party. Derivatives that meet the definition of guarantees include certain written options (e.g., written interest rate and written currency options). Merrill Lynch does not track, for accounting purposes, whether its clients enter into these derivative contracts for speculative or hedging purposes. Accordingly, Merrill Lynch has disclosed information about all credit derivatives and certain types of written options that can potentially be used by clients to protect against changes in an underlying, regardless of how the contracts are actually used by the client.
 
Merrill Lynch’s derivatives that act as guarantees at September 30, 2009 are summarized below:
 
                                                 
(in millions)
    Maximum
                   
    Payout/
  Less than
              Carrying
    Notional   1 year   1+ - 3 years   3+ - 5 years   Over 5 years   Value(1)
 
 
Derivative contracts: