There can be no assurance that we will maintain our current ratings. A reduction in certain of ourcredit ratings would likely have a material adverse effect on our liquidity, access to creditmarkets, the related cost of funds, our businesses and on certain trading revenues, particularly inthose businesses where counterparty creditworthiness is critical. In connection with certain OTCderivatives contracts and other trading agreements, counterparties may require us to provideadditional collateral or to terminate these contracts, agreements and collateral financingarrangements in the event of a credit ratings downgrade of Bank of America (and consequently ML &Co.). Termination of these contracts and agreements could cause us to sustain losses and impair ourliquidity because we would be required to make significant cash payments or pledge securities ascollateral. If Bank of America’s or Merrill Lynch’s commercial paper or short-term credit ratings(which currently have the following ratings: P-1 by Moody’s, A-1 by S&P and F1+ by Fitch) weredowngraded by one or more levels, the potential loss of short-term funding sources such asrepurchase agreement financing and the effect on our incremental cost of funds would be material.During 2009 and 2010, the ratings agencies took numerous actions, many of which were negative, toadjust Bank of America’s and our credit ratings and the outlooks on those ratings. The ratingsagencies have indicated that, as a systemically important financial institution, Bank of America’scredit ratings currently reflect their expectation that, if necessary, Bank of America wouldreceive significant support from the U.S. Government. All three ratings agencies have indicated,however, that they will reevaluate and could reduce the uplift they include in Bank of America’sratings for government support for reasons arising from financial services regulatory reformproposals. Any expectation that government support may be diminished or withheld in the futurewould likely have a negative impact on Bank of America’s (and consequently our) credit ratings. Thetiming of the agencies’ assessments of potential government support, as well as the impact on ourcredit ratings, is currently uncertain.For a further discussion of our liquidity matters, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Funding and Liquidity.”*Our liquidity, cash flows, financial condition and results of operations, and competitive positioncould be significantly adversely affected by the inability of ML & Co. or Bank of America to accesscapital markets or if there is an increase in our borrowing costs.*Liquidity is essential to ourbusiness. We fund our assets primarily with a mix of secured and unsecured liabilities through aglobally coordinated funding strategy with Bank of America. We have established intercompanylending and borrowing arrangements to facilitate centralized liquidity management. As a result, ourliquidity risk is derived in large part from Bank of America’s liquidity risk. Bank of America’sand our liquidity could be significantly adversely affected by an inability to access the capitalmarkets; illiquidity or volatility in the capital markets; unforeseen outflows of cash, includingcustomer deposits, funding for commitments and contingencies; inability to sell assets on favorableterms; or negative perceptions about Bank of America’s and our short- or long-term businessprospects, including changes in credit ratings. Several of these factors may arise due tocircumstances that neither we nor Bank of America may be able to control, such as a general marketdisruption, negative views about the financial services industry generally, changes in theregulatory environment, actions by credit ratings agencies or an operational problem that affectsthird parties, us or Bank of America. For example, during the recent financial crisis, our abilityto raise funding was at times adversely affected in the U.S. and international markets.Our and Bank of America’s cost of obtaining funding is directly related to prevailing marketinterest rates and to credit spreads. Credit spreads are the amount in excess of the interest rateof U.S. Treasury securities, or other benchmark securities, of the same maturity that we or Bank ofAmerica need to pay to funding providers. Increases in interest rates and such credit spreads cansignificantly increase the cost of funding for us and Bank of America. Changes in credit spreadsare market-driven, and may be influenced by market perceptions of the creditworthiness of us andBank of America. Changes to interest rates and credit spreadsoccur continuously and may be unpredictable and highly volatile.For additional information about our liquidity, including credit ratings and outlooks, see“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Fundingand Liquidity.”
 
 

 
*Our dependence upon funds from our subsidiaries and our parent could adversely impact ourliquidity.*ML & Co. is a holding company that is a separate and distinct legal entity from itsparent, Bank of America, and our broker-dealer and other subsidiaries. We evaluate and manageliquidity on a legal entity basis. Legal entity liquidity is an important consideration as thereare legal and other limitations on our ability to utilize liquidity from one legal entity tosatisfy the liquidity requirements of another, including ML & Co. For instance, ML & Co. depends ondividends, distributions and borrowings or other payments from its subsidiaries and may depend inlarge part on financing from Bank of America to fund payments on our obligations, including debtobligations. Bank of America may, in some instances, be unable to provide us with the funding weneed to fund payments on our obligations. Many of our subsidiaries, including ourbroker-dealer subsidiaries, are subject to laws that restrict dividend payments to ML & Co. Inaddition, our broker-dealer subsidiaries are subject to restrictions on their ability to lend ortransact with affiliates and to minimum regulatory capital requirements, as well as restrictions ontheir ability to use funds deposited with them in brokerage accounts to fund their businesses.Additional restrictions on related-party transactions, increased capital requirements andadditional limitations on the use of funds on deposit in brokerage accounts, as well as lowerearnings, can reduce the amount of funds available to meet the obligations of ML & Co. and evenrequire ML & Co. to provide additional funding to such subsidiaries. Regulatory restrictions couldimpede access to funds we need to make payments on our obligations. In addition, ourright to participate in a distribution of assets upon a subsidiary’s liquidation or reorganizationis subject to the prior claims of the subsidiary’s creditors.**Mortgage and Housing Market-Related Risk***We have been, and expect to continue to be, required to repurchase loans and/or reimburse wholeloan buyers, the government-sponsored enterprises (“GSEs”) and monoline bond insurance companies(“monolines”) for losses due to claims related to representations and warranties made in connectionwith sales of residential mortgage-backed securities and other loans, and have received similarclaims, and may receive additional claims, from private-label securitization investors. Theresolution of these claims could have a material adverse effect on our cash flows, financialcondition and results of operations.*In prior years, Merrill Lynch and certain of its subsidiaries,including First Franklin Financial Corporation (“First Franklin”), sold pools of first-lienmortgage loans and home equity loans as private-label securitizations or in the form of wholeloans. In certain cases, all or a portion of the private label securitizations were insured bymonolines. In addition, Merrill Lynch and First Franklin securitized firstlienresidential mortgage loans generally in the form of mortgage-backed securities guaranteed by theGSEs. In connection with these transactions, Merrill Lynch and certain of its subsidiaries madevarious representations and warranties. These representations and warranties, as governed by theagreements, related to, among other things, the ownership of the loan, the validity of the liensecuring the loan, the absence of delinquent taxes or liens against the property securing the loan,the process used to select the loan for inclusion in a transaction, the loan’s compliance with anyapplicable loan criteria, including underwriting standards, and the loan’s compliance withapplicable federal, state and local laws. Breaches of these representations and warranties mayresult in the requirement that we repurchase mortgage loans or otherwise make whole or provideother remedy to counterparties (collectively, repurchase claims).We expect repurchase and similar requests going forward and the volume of repurchase requests frommonolines, whole loan buyers and investors in private-label securitizations could increase in thefuture. It is reasonably possible that future losses may occur and our estimate is that the upperrange of possible loss related to non-GSE sales could be $1 billion to $2 billion over existingaccruals. This estimate does not represent a probable loss, is based on currently availableinformation, significant judgment, and a number of assumptions that are subject to change. Futureprovisions and possible loss or range of possible loss may be impacted if actual results aredifferent from our assumptions regarding economic conditions, home prices and other matters and mayvary by counterparty. We expect that the resolution of the repurchase claims process with thenon-GSE counterparties will likely be a protracted process, and we will vigorously contest anyrequest for repurchase if we conclude that a valid basis for a repurchase claim does not exist.The resolution of claims related to alleged breaches of these representations and warranties andrepurchase claims could have a material adverse effect on our financial condition, cash flows andresults of operations, and could exceed existing estimates and accruals. In addition, any accrualsor estimates we have made are based on assumptions which are subject to change.For additional information about our representations and warranties exposure, see “Management’sDiscussion and Analysis of Financial Condition and Results of Operations — Off-Balance SheetExposures — Representations and Warranties” and Note 14 to the Consolidated Financial Statements.
 
 

 
*Continued, or increasing, declines in the domestic and international housing markets, includinghome prices, may adversely affect our asset classes and have a significant adverse effect on ourfinancial condition and results of operations.*Economic deterioration throughout 2009 and weaknessin the economic recovery in 2010 were accompanied by continued stress in the U.S. and internationalhousing markets, including declines in home prices. These declines in the housing market, withfalling home prices and increasing foreclosures, have negatively impacted the credit performance ofcertain of our portfolios. Continued high unemployment rates in the U.S. have added another elementto the financial challenges facing U.S. consumers and further compounded these stresses in the U.S.housing market as employment conditions may be compelling some consumers to delay new homepurchases or miss payments on existing mortgages.Conditions in the housing market have also resulted in significant write-downs of asset values inseveral asset classes, notably mortgage-backed securities and exposure to monolines. Theseconditions may negatively affect the value of real estate, which could negatively affect ourexposure to representations and warranties. While there were continued indications throughout thepast year that the U.S. economy is stabilizing, the performance of our overall portfolios may notsignificantly improve in the near future. A protracted continuation or worsening of these difficulthousing market conditions would likely exacerbate the adverse effects outlined above and have asignificant adverse effect on our financial condition and results of operations.**Credit Risk***Credit risk is the risk of loss arising from a borrower, obligor or counterparty default when aborrower, obligor or counterparty does not meet its obligations.**Increased credit risk, due to economic or market disruptions, insufficient credit loss reserves orconcentration of credit risk, may necessitate increased provisions for credit losses and could havean adverse effect on our financial condition and results of operations.*When we buy debtsecurities, loan money, commit to loan money or enter into a letter of credit or other contractwith a counterparty, we incur credit risk, or the risk of losses if our borrowers or ourcounterparties fail to perform according to the terms of their agreements. A number of our productsexpose us to credit risk, including loans, derivatives, trading account assets and assetsheld-for-sale and unfunded lending commitments that include loan commitments,letters of credit and financial guarantees. The credit quality of our portfolios has a significantimpact on our earnings.Although credit quality generally continued to show improvement throughout 2010, global andnational economic conditions continue to weigh on our credit portfolios. Economic or marketdisruptions are likely to increase our credit exposure to customers, obligors or othercounterparties due to the increased risk that they may default on their obligations to us.We estimate and establish an allowance for credit risks and credit losses inherent in our lendingactivities (including unfunded lending commitments), excluding those measured at fair value,through a charge to earnings. The amount of allowance is determined based on our evaluation of thepotential credit losses included within our loan portfolio. The process for determining the amountof the allowance requires subjective and complex judgments. Our ability to assess future economicconditions or the creditworthiness of our customers, obligors or other counterparties is imperfect.We may underestimate the credit losses in our portfolios and suffer unexpected losses if the modelsand approaches we use to establish reserves and make judgments in extending credit to our borrowersand other counterparties become less predictive of future behaviors, valuations, assumptions orestimates. In such an event we may need to increase the size of our allowance in 2011, which wouldadversely affect our financial condition and results of operations.In the ordinary course of our business, we also may be subject to a concentration of credit risk toa particular industry, country, counterparty, borrower or issuer. A deterioration in the financialcondition or prospects of a particular industry or a failure or downgrade of, or default by, anyparticular entity or group of entities could have a material adverse impact on our businesses, andthe processes by which we set limits and monitor the level of our credit exposure to individualentities, industries and countries may not function as we have anticipated. While our activitiesexpose us to many different industries and counterparties, weroutinely execute a high volume of transactions with counterparties in the financial servicesindustry, including brokers and dealers, commercial banks, investment funds and insurers. This hasresulted in significant credit concentration with respect to this industry.In the ordinary course of business, we also enter into transactions with sovereign nations, U.S.states and U.S. municipalities. Unfavorable economic or political conditions, disruptions tocapital markets, currency fluctuations, social instability and changes in government policies couldimpact the operating budgets or credit ratings of sovereign nations, U.S. states and U.S.municipalities and expose us to credit risk. The economic downturn has adversely affected certainof our portfolios and further exposed us to this concentration of risk.For additional information about our credit risk and credit risk management policies andprocedures, see “Quantitative and Qualitative Disclosures about Market Risk — Credit RiskManagement.”
 
 

 
*We could suffer losses as a result of the actions of or deterioration in the commercial soundnessof our counterparties and other financial services institutions.*Our ability to engage in routinetrading and funding transactions could be adversely affected by the actions and commercialsoundness of other market participants. We have exposure to many different industries andcounterparties, and we routinely execute transactions with counterparties in the financial servicesindustry, including brokers and dealers, commercial banks, investment banks, mutual and hedge fundsand other institutional clients. Financial services institutions and other counterparties areinter-related because of trading, funding, clearing or other relationships. As a result, defaultsby, or even rumors or questions about, one or more financial servicesinstitutions, or the financial services industry generally, have led to market-wide liquidityproblems and could lead to significant future liquidity problems, including losses or defaults byus or by other institutions. Many of these transactions expose us to credit risk in the event ofdefault of a counterparty or client. In addition, our credit risk may be impacted when thecollateral held by us cannot be realized or is liquidated at prices not sufficient to recover thefull amount of the loan or derivatives exposure due us. Any such losses could materially andadversely affect our financial condition and results of operations.*Our derivatives businesses may expose us to unexpected risks and potential losses.*We are party toa large number of derivatives transactions, including credit derivatives. Our derivativesbusinesses may expose us to unexpected market, credit and operational risks that could cause us tosuffer unexpected losses and have an adverse effect on our financial condition and results ofoperations. Severe declines in asset values, unanticipated credit events or unforeseencircumstances that may cause previously uncorrelated factors to become correlated (and vice versa)may create losses resulting from risks not appropriately taken into account in the development,structuring or pricing of a derivative instrument.Many derivative instruments are individually negotiated and non-standardized, which can makeexiting, transferring or settling some positions difficult. Many derivatives require that wedeliver to the counterparty the underlying security, loan or other obligation in order to receivepayment. In a number of cases, we do not hold, and may not be able to obtain, the underlyingsecurity, loan or other obligation. This could cause us to forfeit the payments due to us underthese contracts or result in settlement delays with the attendant credit and operational risk, aswell as increased costs to us.Derivatives contracts and other transactions entered into with third parties are not alwaysconfirmed by the counterparties or settled on a timely basis. While a transaction remainsunconfirmed or during any delay in settlement, we are subject to heightened credit and operationalrisk and in the event of default may find it more difficult to enforce the contract. In addition,as new and more complex derivatives products have been created, covering a wider array ofunderlying credit and other instruments, disputes about the terms of the underlying contracts mayarise, which could impair our ability to effectively manage our risk exposuresfrom these products and subject us to increased costs.For a further discussion of our derivatives exposure, see Note 6 to the Consolidated FinancialStatements.**Market Risk***Market risk is the risk that values of assets and liabilities or revenues will be adverselyaffected by changes in market conditions such as market volatility. Market risk is inherent in thefinancial instruments associated with our operations and activities, including loans, deposits,securities, short-term borrowings, long-term debt, trading account assets and liabilities, andderivatives.**Our businesses and results of operations have been, and may continue to be, significantly adverselyaffected by changes in the levels of market volatility and by other financial or capital marketconditions.*Our businesses and results of operations may be adversely affected by market riskfactors such as changes in interest and currency exchange rates, equity and futures prices, theimplied volatility of interest rates, credit spreads and other economic and business factors. Thesemarket risks may adversely affect, for example, (i) the value of our on- and off-balance sheetsecurities, trading assets, and other financial instruments, (ii) the cost of debt capital and ouraccess to credit markets, (iii) the value of assets under management, which could reduce our feeincome relating to those assets, (iv) customer allocation of capital among investment alternatives,(v) the volume of client activity in our trading operations, and(vi) the general profitability and risk level of the transactions in which we engage. Any of thesedevelopments could have a significant adverse impact on our financial condition and results ofoperations.
 
 

 
We use various models and strategies to assess and control our market risk exposures but those aresubject to inherent limitations. For example, our models, which rely on historical trends andassumptions, may not be sufficiently predictive of future results due to limited historicalpatterns, extreme or unanticipated market movements and illiquidity, especially during severedownturns or stress events. The models that we use to assess and control our market risk exposuresalso reflect assumptions about the degree of correlation or lack thereof among prices of variousasset classes or other market indicators. In times of market stress or other unforeseencircumstances, such as the market conditions experienced in 2008 and 2009, previouslyuncorrelated indicators may become correlated, or previously correlated indicators may move indifferent directions. These types of market movements have at times limited the effectiveness ofour hedging strategies and have caused us to incur significant losses, and they may do so in thefuture. These changes in correlation can be exacerbated where other market participants are usingrisk or trading models with assumptions or algorithms that are similar to ours. In these and othercases, it may be difficult to reduce our risk positions due to the activity of other marketparticipants or widespread market dislocations, including circumstances where asset values aredeclining significantly or no market exists for certain assets. To the extent that we makeinvestments directly in securities that do not have an established liquid trading marketor are otherwise subject to restrictions on sale or hedging, we may not be able to reduce ourpositions and therefore reduce our risk associated with such positions.For additional information about market risk and our market risk management policies andprocedures, see “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A ofthis Form 10-K.*Declines in the value of certain of our assets could have an adverse effect on our results ofoperations.*We have a large portfolio of financial instruments that we measure at fair value,including among others certain corporate loans and loan commitments, loans held-for-sale,repurchase agreements and long-term deposits. We also have trading assets and liabilities,derivatives assets and liabilities, available-for-sale securities and certain other assets that arevalued at fair value. We determine the fair values of these instruments based on the fair valuehierarchy under applicable accounting guidance. The fair values of these financial instrumentsinclude adjustments for market liquidity, credit quality and other transaction-specific factors,where appropriate.Gains or losses on these instruments can have a direct and significant impact on our results ofoperations, unless we have effectively “hedged” our exposures. Fair values may be impacted bydeclining values of the underlying assets or the prices at which observable market transactionsoccur and the continued availability of these transactions. The financial strength ofcounterparties, such as monolines, with whom we have economically hedged some of our exposure tothese assets, also will affect the fair value of these assets. Sudden declines and significantvolatility in the prices of assets may substantially curtail or eliminate the trading activity forthese assets, which may make it very difficult to sell, hedge or value such assets. Theinability to sell or effectively hedge assets reduces our ability to limit losses in such positionsand the difficulty in valuing assets may increase our risk-weighted assets, which requires us tomaintain additional capital and increases our funding costs.Asset values also directly impact revenues in our asset management businesses. We receiveasset-based management fees based on the value of our clients’ portfolios or investments in fundsmanaged by us and, in some cases, we also receive incentive fees based on increases in the value ofsuch investments. Declines in asset values can reduce the value of our clients’ portfolios or fundassets, which in turn can result in lower fees earned for managing such assets.For additional information about fair value measurements, see Note 5 to the Consolidated FinancialStatements.*Our commodities activities, particularly our physical commodities business, subject us toperformance, environmental and other risks that may result in significant cost and liabilities.*Aspart of our commodities business, we enter into exchange-traded contracts, financially settled OTCderivatives, contracts for physical delivery and contracts providing for the transportation,transmission and/or storage rights on or in vessels, barges, pipelines, transmission lines orstorage facilities. Commodity, related storage, transportation or other contracts expose us to therisk that the price of the underlying commodity or the cost of storing or transporting commoditiesmay rise or fall. In addition, contracts relating to physical ownership and/or delivery can exposeus to numerous other risks, including performance and environmental risks. For example, ourcounterparties may not be able to pass changes in the price of commodities to their customers andtherefore may not be able to meet their performance obligations. Our actions to mitigate theaforementioned risks may not prove adequate to address every contingency. In addition, insurancecovering some of these risks may not be available, and the proceeds, if any, from insurancerecovery may not be adequate to cover liabilities with respect to particularincidents. As a result, our financial condition and results of operations may be adversely affectedby such events.
 
 

 
**Regulatory and Legal Risk***Government measures to regulate the financial services industry, including the Financial ReformAct, either individually, in combination or in the aggregate, could require us to change certain ofour business practices, impose significant additional costs on us, limit the products that weoffer, limit our ability to pursue business opportunities in an efficient manner, require us toincrease our capital, impact the value of assets that we hold, significantly reduce our revenues orotherwise materially and adversely affect our businesses, financial condition or results ofoperations.*As a financial institution, we are heavily regulated at the state, federal andinternational levels. As a result of the financial crisis and related global economic downturn thatbegan in 2007, we have faced and expect to continue to face increased public and legislativescrutiny as well as stricter and more comprehensive regulation of our financial services practices.These regulatory and legislative measures, either individually, in combination or in the aggregate,could require us to change certain of our business practices, impose significant additional costson us, limit the products that we offer, limit our ability to pursue business opportunities in anefficient manner, require us to increase our capital, impact the value of assets that we hold,significantly reduce our revenues or otherwise materially and adversely affect our businesses,financial condition or results of operations.In July 2010, the Financial Reform Act was signed into law. The Financial Reform Act, among otherreforms, (i) limits banking organizations from engaging in proprietary trading and other investmentactivity regarding hedge funds and private equity funds; (ii) increases regulation of the OTCderivative markets; (iii) provides for heightened capital, liquidity, and prudential regulation andsupervision over systemically important financial institutions; (iv) provides for resolutionauthority to establish a process to unwind large systemically important financial companies; and(v) requires securitizers to retain a portion of the risk that would otherwise be transferred intocertain securitization transactions.Many of these provisions have begun to be or will be phased in over the next several months oryears and will be subject both to further rulemaking and the discretion of applicable regulatorybodies. The ultimate impact of the final rules on our businesses and results of operations willdepend on regulatory interpretation and rulemaking, as well as the success of any of our actions tomitigate the negative earnings impact of certain provisions.We anticipate that the final regulations associated with the Financial Reform Act will includelimitations on certain activities, including limitations on the use of certain financialinstitutions’ own capital for proprietary trading and sponsorship or investment in hedge funds andprivate equity funds (the Volcker Rule). Regulations implementing the Volcker Rule are required tobe in place by October 21, 2011, and the Volcker Rule becomes effective twelve months after suchrules are final or on July 21, 2012, whichever is earlier. The Volcker Rule then gives certainfinancial institutions two years from the effective date (with opportunities for additionalextensions) to bring activities and investments into conformance. In anticipationof the adoption of the final regulations, we have begun winding down our proprietary trading lineof business. The ultimate impact of the Volcker Rule or the winding down of this business, and thetime it will take to comply or complete, continues to remain uncertain. The final regulationsissued may impose additional operational and compliance costs on us.The Financial Reform Act includes measures to broaden the scope of derivative instruments subjectto regulation by requiring clearing and exchange trading of certain derivatives, imposing newcapital and margin requirements for certain market participants and imposing position limits oncertain OTC derivatives. The Financial Reform Act grants the CFTC and the SEC substantial newauthority and requires numerous rulemakings by these agencies. Generally, the CFTC and SEC haveuntil July 16, 2011 to promulgate the rulemakings necessary to implement these regulations. Theultimate impact of these derivatives regulations, and the time it will take to comply, continues toremain uncertain. The final regulations will impose additional operational and compliance costs onus and may require us to restructure certain businesses and negatively impact our revenues andresults of operations.Although we cannot predict the full effect of the Financial Reform Act on our operations, it, aswell as the future rules implementing its reforms, could result in a significant loss of revenue,impose additional costs on us, require us to increase our capital or otherwise materially adverselyaffect our businesses, financial condition or results of operations.In addition, Congress and the Administration have signaled growing interest in reforming theU.S. corporate income tax. While the timing of consideration of such legislative reform is unclear,possible approaches include lowering the 35% corporate tax rate, modifying the taxation of incomeearned outside of the U.S. and limiting or eliminating various other deductions, tax credits and/orother tax preferences. It is not possible at this time to quantify either theone-time impact from remeasuring deferred tax assets and liabilities that might result upon enactmentof tax reform or the ongoing impact reform might have on income tax expense, but it is possibleeither of these impacts could adversely affect our financial condition and results of operations.
 
 

 
Other countries have also proposed and, in some cases, adopted certain regulatory changes targetedat financial institutions or that otherwise affect us. For example, the European Union has adoptedincreased capital requirements and the U.K. has (i) increased liquidity requirements for localfinancial institutions, including regulated U.K. subsidiaries of non-U.K. bank holding companiesand other financial institutions as well as branches of non-U.K. banks located in the U.K; (ii)adopted a Bank Tax Levy which will apply to the aggregate balance sheet of branches andsubsidiaries of non-U.K. banks and banking groups operating in the U.K.; (iii) proposed thecreation and production of recovery and resolution plans (commonly referred to as living wills) byU.K. regulated entities; and (iv) announced the expectation of corporate income taxrate reductions of one percent to be enacted during each of 2011, 2012 and 2013 that wouldfavorably impact income tax expense on future earnings but which would result in adjustments to thecarrying value of deferred tax assets and related one-time charges to income tax expense of nearly$400 million for each one percent reduction (however, it is possible that the full three percentrate reductions could be enacted in 2011, which would result in a 2011 charge of approximately $1.1billion). We are also monitoring other international legislative proposals that could materiallyimpact us, such as changes to income tax laws. Currently, in the U.K., net operating loss (“NOL”)carryforwards have an indefinite life. Were the U.K. taxing authorities to introduce limitations onthe future utilization of NOLs and we were unable to document our continued ability to fullyutilize our NOLs, we would be required to establish a valuation allowance by a charge to income taxexpense. Depending upon the nature of the limitations, such a change could be material in theperiod of enactment.*We face substantial potential legal liability and significant regulatory action, which could havematerial adverse effects on our cash flows, financial condition and results of operations or causesignificant reputational harm to us.*We face significant legal risks in our businesses, and thevolume of claims and amount of damages and penalties claimed in litigation and regulatoryproceedings against us and other financial institutions remain high and are increasing. Increasedlitigation costs, substantial legal liability or significant regulatory action against us couldhave material adverse effects on our financial condition and results of operations or causesignificant reputational harm to us, which in turn could adversely impact ourbusiness prospects. In addition, we continue to face increased litigation risk and regulatoryscrutiny as a result of our acquisition by Bank of America. As a result of ongoing challengingeconomic conditions and the increased level of defaults over recent years, we have continued toexperience increased litigation and other disputes with counterparties regarding relative rightsand responsibilities. These litigation and regulatory matters and any related settlements couldhave a material adverse effect on our cash flows, financial condition and results of operations.They could also negatively impact our reputation. For a further discussion of litigation risks, seeNote 14 to the Consolidated Financial Statements.*Changes in governmental fiscal and monetary policy could adversely affect our financial conditionand results of operations.*Our businesses and earnings are affected by domestic and internationalfiscal and monetary policy. For example, the Federal Reserve Board regulates the supply of moneyand credit in the U.S. and its policies determine in large part our cost of funds for lending,investing and capital raising activities and the return we earn on those loans and investments,both of which affect our net interest revenue. The actions of the Federal Reserve Board also canmaterially affect the value of financial instruments we hold, such as debt securities, and itspolicies also can affect our borrowers, potentially increasing the risk that they may fail to repaytheir loans. Our businesses and earnings are also affected by the fiscal or other policies that areadopted by various U.S. regulatory authorities, non-U.S. governments and international agencies.Changes in domestic and international fiscal and monetary policies are beyond our control anddifficult to predict, but could have an adverse impact on our capital requirements and the costs ofrunning our businesses, in turn adversely impacting our financial condition and results ofoperations.**Risk of the Competitive Environment in Which We Operate***We face significant and increasing competition in the financial services industry.*We operate in ahighly competitive environment. Over time, there has been substantial consolidation among companiesin the financial services industry, and this trend accelerated in recent years as the credit crisisled to numerous mergers and asset acquisitions among industry participants and in certain casesreorganization, restructuring, or even bankruptcy. This trend has also hastened the globalizationof the securities and financial services markets. We will continue to experience intensifiedcompetition as further consolidation in the financial services industry in connection with currentmarket conditions may produce larger, better capitalized and more geographically diverse companiesthat are capable of offering a wider array of financial products and services at more competitiveprices. To the extent we expand into new business areas and new geographic regions, we may facecompetitors with more experience and more established relationships with clients, regulators andindustry participants in the relevant market, which could adverselyaffect our ability to compete. In addition, technological advances and the growth of e-commercehave made it possible for non-depository institutions to offer products and services thattraditionally were banking products, and for financial institutions to compete with technologycompanies in providing electronic and internet-based financial solutions. Increased competition maynegatively affect our results of operations by creating pressure to lower prices on ourproducts and services and reducing market share.
 
 

 
*Damage to our reputation could significantly harm our businesses, including our competitiveposition and business prospects.*Our ability to attract and retain customers, clients and employeescould be adversely affected to the extent our reputation is damaged. Significant harm to ourreputation can arise from many sources, including indirectly as a result of actions by Bank ofAmerica or damage to its reputation, employee misconduct, litigation or regulatory outcomes,failing to deliver minimum standards of service and quality, compliance failures, unethicalbehavior, unintended disclosure of confidential information, and the activities of our clients,customers and counterparties. Actions by the financial services industry generally or by certainmembers or individuals in the industry also can significantly adversely affect our reputation.Our actual or perceived failure to address various issues also could give rise to reputational riskthat could cause significant harm to us and our business prospects, including failure to properlyaddress operational risks. These issues include legal and regulatory requirements, privacy,properly maintaining customer and employee personal information, record keeping, protecting againstmoney-laundering, sales and trading practices, ethical issues, and the proper identification of thelegal, reputational, credit, liquidity and market risks inherent in our products.We could suffer significant reputational harm if we fail to properly identify and manage potentialconflicts of interest. Management of potential conflicts of interests has become increasinglycomplex as we expand our business activities through more numerous transactions, obligations andinterests with and among our clients. The failure to adequately address, or the perceived failureto adequately address, conflicts of interest could affect the willingness of clients to deal withus, or give rise to litigation or enforcement actions, which could adversely affect our businesses.We continue to face increased public and regulatory scrutiny resulting from the financial crisis,including our acquisition by Bank of America and the suitability of certain trading and investmentbusinesses. Failure to appropriately address any of these issues could also give rise to additionalregulatory restrictions, legal risks and reputational harm, which could, among other consequences,increase the size and number of litigation claims and damages asserted or subject us to enforcementactions, fines and penalties and cause us to incur related costs and expenses.*Our ability to attract and retain qualified employees is critical to the success of our businessesand failure to do so could adversely affect our business prospects, including our competitiveposition and results of operations.*Our performance is heavily dependent on the talents and effortsof highly skilled individuals. Competition for qualified personnel within the financial servicesindustry and from businesses outside the financial services industry has been, and is expected tocontinue to be, intense even during difficult economic times. Our competitors includenon-U.S.-based institutions and institutions otherwise not subject to compensation and hiringregulations imposed on U.S. institutions and financial institutions in particular. The difficultywe face in competing for key personnel is exacerbated in emerging markets, where we are oftencompeting for qualified employees with entities that may have a significantly greater presence ormore extensive experience in the region.In order to attract and retain qualified personnel, we must provide market-level compensation. As asubsidiary of Bank of America, we may be subject to limitations on compensation practices (whichmay or may not affect our competitors) by regulators in the U.S. or around the world. Any futurelimitations on executive compensation imposed by legislators and regulators could adversely affectour ability to attract and maintain qualified employees. Furthermore, a substantial portion of ourannual bonus compensation paid to our senior employees has in recent years taken the form oflong-term equity awards. The value of long-term equity awards to senior employees generally hasbeen negatively affected by the significant decline in the market price of Bank of AmericaCorporation common stock. If we are unable to continue to attract and retain qualified individuals,our business prospects, including our competitive position and results of operations, could beadversely affected.If we materially fail to retain the advisors that we employ in our wealth and investment managementbusiness, particularly those with significant client relationships, such failure could result in asignificant loss of clients or the withdrawal of significant client assets. Any such loss orwithdrawal could adversely impact our wealth and investment management business activities and ourresults of operations, financial condition and cash flows.
 
 

 
*Our inability to adapt our products and services to evolving industry standards and consumerpreferences could harm our businesses.*Our success depends, in part, on our ability to adapt ourproducts and services to evolving industry standards. There is increasing pressure by competitorsto provide products and services at lower prices. This can reduce our revenues from our fee-basedproducts and services. In addition, the widespread adoption of new technologies, including internetservices, could require us to incur substantial expenditures to modify or adapt our existingproducts and services. We might not be successful in developing or introducing new products andservices, responding or adapting to changes in consumer spending and saving habits, achievingmarket acceptance of our products and services, or sufficiently developing and maintaining loyalcustomers.**Risks Related to Risk Management***Our risk management framework may not be effective in mitigating risk and reducing the potentialfor significant losses.*Our risk management framework is designed to minimize risk and loss to us.We seek to identify, measure, monitor, report and control our exposure to the types of risk towhich we are subject, including strategic, credit, market, liquidity, compliance, fiduciary,operational and reputational risks, among others. While we employ a broad and diversified set ofrisk monitoring and mitigation techniques, those techniques are inherently limited because theycannot anticipate the existence or future development of currently unanticipated or unknown risks.For example, recent economic conditions, heightened legislative and regulatory scrutiny of thefinancial services industry, among other developments, have resulted in the creation of a varietyof previously unanticipated or unknown risks, highlighting the intrinsic limitations of our riskmonitoring and mitigation techniques. As such, we may incur future losses due to thedevelopment of such previously unanticipated or unknown risks.*A failure in or breach of our operational or security systems or infrastructure, or those of thirdparties, could disrupt our businesses, result in the disclosure of confidential information ordamage our reputation. Any such failure also could have a significant adverse effect on ourreputation, cash flows, financial condition and results of operations.*Our business is highlydependent on our ability to process and monitor, on a continuous basis, a large number oftransactions, many of which are highly complex, across numerous and diverse markets in manycurrencies. The potential for operational risk exposure exists throughout our organization,including losses resulting from unauthorized trades by any employees. Integral to our performanceis the continued efficacy of our internal processes, systems, relationships with third parties andthe vast array of employees and key executives in our day-to-day and ongoing operations. Ourfinancial, accounting, data processing or other operating systems and facilities may fail tooperate properly or become disabled as a result of events that are wholly or partially beyond ourcontrol and adversely affect our ability to process these transactions or provide these services.We must continuously update these systems to support our operations and growth. This updatingentails significant costs and creates risks associated with implementing new systems andintegrating them with existing ones.In addition, we also face the risk of operational failure, termination or capacity constraints ofany of the clearing agents, exchanges, clearing houses or other financial intermediaries we use tofacilitate our securities transactions. In recent years, there has been significant consolidationamong clearing agents, exchanges and clearing houses, which has increased our exposure tooperational failure, termination or capacity constraints of the particular financial intermediariesthat we use and could affect our ability to find adequate and cost-effective alternatives in theevent of any such failure, termination or constraint. Industryconsolidation, whether among market participants or financial intermediaries, increases the risk ofoperational failure as disparate complex systems need to be integrated, often on an acceleratedbasis.Furthermore, the interconnectivity of multiple financial institutions with central agents,exchanges and clearing houses, and the increased centrality of these entities under proposed andpotential regulation, increases the risk that an operational failure at one institution or entitymay cause an industry-wide operational failure that could adversely impact our own businessoperations. Any such failure, termination or constraint could adversely affect our ability toeffect transactions, service our clients, manage our exposure to risk or expand our businesses andcould have a significant adverse impact on our liquidity, financial condition and results ofoperations.
 
 

 
Our operations rely on the secure processing, storage and transmission of confidential and otherinformation in our computer systems and networks. Although we take protective measures and endeavorto modify them as circumstances warrant, the security of our computer systems, software andnetworks may be vulnerable to breaches, unauthorized access, misuse, computer viruses or othermalicious code and other events that could have a security impact. Additionally, breaches ofsecurity may occur through intentional or unintentional acts by those having authorized orunauthorized access to our or our clients’ or counterparties’ confidential or other information. Ifone or more of such events occur, this potentially could jeopardize our or our clients’ orcounterparties’ confidential and other information processed and stored in, and transmittedthrough, our computer systems and networks, or otherwise cause interruptions or malfunctions inour, our clients’, our counterparties’ or third parties’ operations, which could result insignificant losses or reputational damage to us. We may be required to expend significantadditional resources to modify our protective measures or to investigate and remediatevulnerabilities or other exposures arising from operational and security risks, and we may besubject to litigation and financial losses that are either not insured against or not fully coveredthrough any insurance maintained by us.We routinely transmit and receive personal, confidential and proprietary information by email andother electronic means. We have discussed and worked with clients, vendors, service providers,counterparties and other third parties to develop secure transmission capabilities, but we do nothave, and may be unable to put in place, secure capabilities with all of our clients, vendors,service providers, counterparties and other third parties, and we may not be able to ensure thatthese third parties have appropriate controls in place to protect the confidentiality of theinformation. Any interception, misuse or mishandling of personal, confidential or proprietaryinformation being sent to or received from a client, vendor, service provider, counterparty orother third party could result in legal liability, regulatory action and reputational harm for usand could have a significant adverse effect on our competitive position, financial condition andresults of operations.With regard to the physical infrastructure that supports our operations, we have taken measures toimplement backup systems and other safeguards, but our ability to conduct business may be adverselyaffected by any disruption to that infrastructure. Such disruptions could involve electrical,communications, internet, transportation or other services used by us or third parties with whom weconduct business. These disruptions may occur as a result of events that affect only our facilitiesor those of our clients or other business partners but they could also be the result of events witha broader impact globally, regionally or in the cities where those facilities are located. Thecosts associated with such disruptions, including any loss of business, could have a significantadverse effect on our results of operations or financial condition.Any of these operational and security risks could lead to significant and negative consequences,including reputational harm as well as loss of customers and business opportunities, which in turncould have a significant adverse effect on our businesses, cash flows, financial condition orresults of operations.**Risk Related to Business Combination Transactions***Any failure to successfully integrate with Bank of America could adversely affect our business.*Wewere acquired by Bank of America in 2009. The success of this acquisition faces numerouschallenges, including the ability to realize the anticipated benefits and cost savings of combiningthe businesses of Merrill Lynch and Bank of America. It is possible that the continued integrationprocess of our acquisition could result in disruption of our ongoing businesses or inconsistenciesin standards, controls, procedures and policies that adversely affect our ability to maintainsufficiently strong relationships with clients, customers, depositors and employees or to achievethe anticipated benefits of the acquisition. Integration efforts may also divertmanagement attention and resources. These integration matters could have an adverse effect on usfor an undetermined period. We will be subject to similar risks and difficulties in connection withany future acquisitions or decisions to downsize, sell or close units or otherwise change thebusiness mix of Merrill Lynch.**Risk of Being an International Business***We are subject to numerous political, economic, market, reputational, operational, legal,regulatory and other risks in the non-U.S. jurisdictions in which we operate which could adverselyimpact our businesses.*We do business throughout the world, including in developing regions of theworld commonly known as emerging markets. Our businesses and revenues derived from non-U.S.jurisdictions are subject to risk of loss from currency fluctuations, social or judicialinstability, changes in governmental policies or policies of central banks, expropriation,nationalization and/or confiscation of assets, price controls, capital controls, exchange controls,other restrictive actions, unfavorable political and diplomatic developmentsand changes in legislation. These risks are especially acute in emerging markets. As in the U.S.,many non-U.S. jurisdictions in which we do business have been negatively impacted by recessionaryconditions. While a number of these jurisdictions are showing signs of recovery, others continue toexperience increasing levels of stress. In addition, the risk of default on sovereign debt in somenon-U.S. jurisdictions is increasing and could expose us to substantial losses. Any suchunfavorable conditions or developments could have an adverse impact on our businesses and resultsof operations.
 
 

 
Our non-U.S. businesses are also subject to extensive regulation by various non-U.S. regulators,including governments, securities exchanges, central banks and other regulatory bodies, in thejurisdictions in which those businesses operate. In many countries, the laws and regulationsapplicable to the financial services and securities industries are uncertain and evolving, and itmay be difficult for us to determine the exact requirements of local laws in every market or manageour relationships with multiple regulators in various jurisdictions. Our inability to remain incompliance with local laws in a particular market and manage our relationships with regulatorscould have a significant and adverse effect not only on our businesses in thatmarket but also on our reputation generally.We also invest or trade in the securities of corporations and governments located in non-U.S.jurisdictions, including emerging markets. Revenues from the trading of non-U.S. securities may besubject to negative fluctuations as a result of the above factors. Furthermore, the impact ofthese fluctuations could be magnified because non-U.S. trading markets, particularly in emergingmarket countries, are generally smaller, less liquid and more volatile than U.S. trading markets.We are subject to geopolitical risks, including acts or threats of terrorism, and actions taken bythe U.S. or other governments in response and/or military conflicts, that could adversely affectbusiness and economic conditions abroad as well as in the U.S.**Risk from Accounting Changes***Changes in accounting standards or inaccurate estimates or assumptions in the application ofaccounting policies could adversely affect our financial condition and results of operations.*Ouraccounting policies and methods are fundamental to how we record and report our financial conditionand results of operations. Some of these policies require use of estimates and assumptions that mayaffect the reported value of our assets or liabilities and results of operations and are criticalbecause they require management to make difficult, subjective and complex judgments about mattersthat are inherently uncertain. If those assumptions, estimates or judgments were incorrectly made,we could be required to correct and restate prior period financial statements.Accounting standard-setters and those who interpret the accounting standards (such as the FinancialAccounting Standards Board, the SEC and our independent registered public accounting firm) may alsoamend or even reverse their previous interpretations or positions on how various standards shouldbe applied. These changes can be hard to predict and can materially impact how we record and reportour financial condition and results of operations. In some cases, we could be required to apply anew or revised standard retroactively, resulting in Merrill Lynch needing to revise and republishprior period financial statements. For a further discussion of some of our critical accountingpolicies and standards and recent accounting changes, see Note 1 to the Consolidated FinancialStatements.**Risk of Being a Wholly-Owned Subsidiary***We are a direct wholly-owned subsidiary of Bank of America and therefore are subject to strategicdecisions of Bank of America Corporation and affected by Bank of America’s performance.*We arefundamentally affected by our relationship with Bank of America. As a direct wholly-ownedsubsidiary of Bank of America, we are subject to a wide range of possible strategic decisions thatBank of America may make from time to time. Those strategic decisions could include the level andtypes of financing and other support made available to us by Bank of America. In addition,circumstances and events affecting Bank of America can significantly affect us. For example, theprimary drivers of our credit ratings are Bank of America’s credit ratings, and when ratingagencies take actions regarding Bank of America’s credit ratings and outlooks, they generally takethe same actions with respect to our ratings and outlooks. Also, we haveseveral borrowing arrangements and a globally coordinated funding strategy with Bank of America.Significant changes in Bank of America’s strategy or its relationship with us could have a materialadverse effect on our business. Material adverse changes in the performance of Bank of America orits other subsidiaries could have a material adverse effect on our results of operations, financialcondition and liquidity. We are indirectly exposed, therefore, to many of the risks to which Bankof America is directly exposed. Bank of America has not assumed or guaranteed the long-term debtthat was issued or guaranteed by ML & Co. or its subsidiaries prior to the acquisition of MerrillLynch by Bank of America.As a wholly-owned subsidiary of Bank of America, a bank holding company that is also a financialholding company, we are subject to the oversight of, and inspection by, the Board of Governors ofthe Federal Reserve Board. If Bank of America does not comply with regulatory requirementsapplicable to banking institutions with respect to regulatory capital, capital ratios and liquidityand required increases in the foregoing, our liquidity would be adversely affected. Inorder to comply with such requirements, Bank of America may be required to liquidate companyassets, among other actions. Our activities are limited to those that are permissible for Bank ofAmerica under applicable laws and regulations. As a financial holding company, Bank of America(directly or through its subsidiaries) may engage in activities that are “financial in nature.”Bank of America’s status as a financial holding company requires, among other conditions, that eachof its subsidiary insured depository institutions be well-capitalized and well-managed.Failure to satisfy these conditions may result in the Federal Reserve Board limiting the activitiesof Bank of America, which thereby could restrict our current business activities, requiredivestiture of certain of our assets and operations or limit potential future strategic plans.