In addition, other countries, including the United Kingdom (“U.K.”) and France, have proposed andin some cases adopted, certain reforms targeted at financial institutions, including, but notlimited to, increased capital and liquidity requirements for local entities, including regulatedU.K. subsidiaries of foreign companies and other financial institutions as well as branches offoreign banks located in the U.K., the creation and production of recovery and resolutions plans(commonly referred to as living wills) by such entities, and a significant payroll tax on bankbonuses paid to employees over a certain threshold.In addition, the U.S. Congress is currently considering reinstating income tax provisions that haverecently expired whereby income of certain foreign subsidiaries would not be subject to currentU.S. income tax as a result of long-standing deferral provisions applicable to active financeincome. These provisions, which in the past have expired and been extended, expired for taxableyears beginning on or after January 1, 2010. Absent an extension of these provisions, activefinancing income earned by our foreign subsidiaries after January 1, 2010 will generally be subjectto a tax that considers the incremental U.S. income tax. The impact of the expiration of theprovisions should they not be extended would be significant. The exact impact would depend upon theamount, composition and geographic mix of our future earnings.Compliance with current or future legislative and regulatory initiatives could require us to changecertain of our business practices, impose significant additional costs on us, limit the productsthat we offer, result in a significant loss of revenue, limit our ability to pursue businessopportunities in an efficient manner, require us to increase our regulatory capital, cause businessdisruptions, impact the value of assets that we hold or otherwise adversely affect our business,results of operations or financial condition. We have recently witnessed the introduction of anever-increasing number of regulatory proposals that could substantially impact us and others in thefinancial services industry. The extent of changes imposed by, and frequency of adoption of, anyregulatory initiatives could make it more difficult for us to comply in a timely manner, whichcould further limit our operations, increase compliance costs or divert management attention orother resources. The long-term impact of these initiatives on our business practices and revenueswill depend upon the successful implementation of our strategies and competitors’ responses to suchinitiatives, both of which are difficult to predict.*We could suffer losses as a result of the actions of or deterioration in the commercial soundnessof other financial services institutions and counterparties, including as a result of derivativestransactions.*Our ability to engage in routine trading and funding transactions could be adverselyaffected by the actions and commercial soundness of other market participants. Financial servicesinstitutions are interrelated as a result of trading, funding, clearing, counterparty or otherrelationships. We have exposure to many different industries and counterparties, and we routinelyexecute transactions with counterparties in the financial services industry, including brokers anddealers, commercial banks, investment banks, mutual and hedge funds, and other institutionalclients. As a result, defaults by, or even rumors or questions about, one or more financialservices institutions, or the financial services industry generally, have led to market-wideliquidity disruptions and could lead to future losses or defaults by us or by other institutions.Many of these transactions expose us to credit risk in the event of default of a counterparty orclient, and our results of operations in 2008 and to a lesser extent in 2009 were materiallyaffected by the credit valuation adjustments described in Item 7 — “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — U.S. ABS CDO and Other Mortgage-RelatedActivities — Monoline Financial Guarantors”. In addition, our credit risk may be exacerbated whenthe collateral held by us cannot be realized or is liquidated at prices not sufficient to recoverthe full amount of the loan or derivative exposure due to us. There is no assurance that any suchlosses would not materially and adversely affect our results of operations or financial condition.We are party to a large number of derivative transactions, including credit derivatives. Many ofthese derivative instruments are individually negotiated and non-standardized, which can makeexiting, transferring or settling some positions difficult. Many credit 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.Derivative contracts and other transactions entered into with third parties are not alwaysconfirmed by the counterparties on a timely basis. While the transaction remains unconfirmed, weare subject to heightened credit and operational risk and in the event of default may find it moredifficult to enforce the contract. In addition, as new and more complex derivative products havebeen created, covering a wider array of underlying credit and other instruments, disputesabout the terms of the underlying contracts may arise, which could impair our ability toeffectively manage our risk exposures from these products and subject us to increased costs.For further discussion of our exposure to derivatives, see Note 6 to the Consolidated FinancialStatements.
 
 

 
*Changes in accounting standards or inaccurate estimates or assumptions in the application ofaccounting policies could adversely affect our financial results.*Our accounting policies andmethods are fundamental to how we record and report our financial condition and results ofoperations. Some of these policies require use of estimates and assumptions that may affect thereported value of our assets or liabilities and financial results and are critical because theyrequire management to make difficult, subjective and complex judgments about matters that areinherently uncertain.Recently, the Financial Accounting Standards Board (“FASB”) and the SEC have adopted new guidanceor rules relating to financial accounting such as, among other things, new FASB guidance on theconsolidation of variable interest entities. In addition, accounting standard setters and those whointerpret the accounting standards (such as the FASB, the SEC and our independent registered publicaccounting firm) may amend or even reverse their previous interpretations or positions on how thesestandards should be applied. These changes can be hard to predict and can materially impact how werecord and report our financial condition and results of operations. In some cases, we could berequired to apply a new or revised standard retroactively, resulting in the restatement of priorperiod financial statements.For a further discussion of some of our significant accounting policies and recent accountingchanges, see Note 1 to the Consolidated Financial Statements.*Our ability to attract and retain clients and employees could be adversely affected to the extentour reputation is harmed.*Our actual or perceived failure to address various issues could giverise to reputational risk that could harm us and our business prospects. These issues include, butare not limited to, legal and regulatory requirements, privacy, properly maintaining client andemployee personal information, record keeping, money-laundering, sales and trading practices,ethical issues, appropriately addressing potential conflicts of interest, and the properidentification of the legal, reputational, credit, liquidity and market risks inherent in ourproducts. Failure to appropriately address any of these issues could also give rise to additionalregulatory restrictions, reputational harm and legal risks, which could increase the size andnumber of litigation claims and damages asserted or subject us to enforcement actions, fines andpenalties and cause us to incur related costs and expenses.*We face substantial potential legal liability and significant regulatory action, which could havematerially adverse financial consequences or cause significant reputational harm to us.*We facesignificant legal risks in our businesses, and the volume of claims, amount of damages andpenalties claimed in litigation, and regulatory proceedings against us and other financialinstitutions remain high and are increasing. Increased litigation costs, substantial legalliability or significant regulatory action against Bank of America or us could have materialadverse financial effects or cause significant reputational harm to us, which in turn couldseriously harm our business prospects. These litigation and regulatory matters and any relatedsettlements could adversely impact our earnings.For a further discussion of litigation risks, see Note 14 to the Consolidated Financial Statements.*Our liquidity could be impaired by an inability of Bank of America to access the capital markets onfavorable terms.*Liquidity is essential to our businesses. Since we were acquired by Bank ofAmerica, we established intercompany lending and borrowing arrangements with Bank of America tofacilitate centralized liquidity management and as a result, our liquidity risk is derived in largepart from Bank of America’s liquidity risk. Bank of America’s liquidity could be impaired by aninability to access the capital markets or by unforeseen outflows of cash, including deposits. Thissituation may arise due to circumstances that Bank of America or we may be unable to control, suchas a general market disruption, negative views about the financial services industry generally, oran operational problem that affects third parties or us. Bank of America’s ability to raise certaintypes of funds has been and could continue to be adversely affected by conditions in the UnitedStates and international markets and economies. In 2009, global capital and credit marketscontinued to experience volatility and disruptions. As a result, Bank of America utilized severalof the U.S. Government liquidity programs, which are temporary in nature, to enhance its liquidityposition. Bank of America’s ability and our ability to borrow from other financial institutions orto engage in securitization funding transactions on favorable terms could be adversely affected bycontinued disruptions in the capital markets or other events, including actions by rating agenciesor deteriorating investor expectations.
 
 

 
Our credit ratings and Bank of America’s credit ratings are important to our liquidity. Ratingagencies regularly evaluate Bank of America and us. Their ratings of our long-term and short-termdebt and other securities are based on a number of factors, including Bank of America’s and ourfinancial strength as well as factors not entirely within our control, including conditionsaffecting the financial services industry generally. During 2009, the rating agencies took numerousactions with respect to Bank of America’s and our credit ratings and outlooks, many of which werenegative. The rating agencies have indicated that our credit ratings currently reflect theirexpectation that, if necessary, Bank of America would receive significant support from theU.S. Government. In February 2010, a rating agency affirmed our current credit ratings but revisedthe outlook to negative from stable, based on their belief that it is less certain whether theU.S. Government would be willing to provide extraordinary support to Bank of America. In light ofthe difficulties in the financial services industry and the financial markets, there can be noassurance that we will maintain our current ratings. Failure to maintain those ratings couldadversely affect our liquidity and competitive position, by materially increasing our borrowingcosts or significantly limiting our access to the capital markets. A reduction in our creditratings also could have a significant impact on certain trading revenues, particularly in thosebusinesses where counterparty credit-worthiness is critical. In connection with certain tradingagreements, we may be required to provide additional collateral in the event of a credit ratingsdowngrade.For a further discussion of our liquidity position and other liquidity matters and the policies andprocedures we use to manage our liquidity risks, see “Liquidity Risk” in Item 7 — Management’sDiscussion and Analysis of Financial Condition and Results of Operations.*Changes in financial or capital market conditions could cause our earnings and the value of ourassets to decline.*Market risk generally represents the risk that values of assets and liabilitiesor revenues will be adversely affected by changes in market conditions. As a result, we aredirectly and indirectly affected by changes in market conditions. For example, changes in interestrates could adversely affect our principal transaction revenues and net interest profit (which weview together as our trading revenues), which could in turn affect our net earnings. Market risk isinherent in the financial instruments associated with our operations and activities includingsecurities, derivatives, loans, deposits, short-term borrowings and long-term debt. Just a few ofthe market conditions that may shift from time to time, thereby exposing us to market risk, includefluctuations in interest and currency exchange rates, equity and futures prices, changes in theimplied volatility of interest rates, foreign exchange rates, credit spreads and pricedeterioration or changes in value due to changes in market perception or actual credit quality ofeither the issuer or its country of origin. Accordingly, depending on the instruments or activitiesimpacted, market risks can have wide ranging, complex adverse effects on our results fromoperations and our overall financial condition. In addition, we also may incur significantunrealized gains or losses as a result of changes in our credit spreads or those of third parties,which may affect the fair value of derivative instruments and debt securities that we hold orissue.The models that we use to assess and control our risk exposures reflect assumptions about thedegree of correlation or lack thereof among prices of various asset classes or other marketindicators. In times of market stress or other unforeseen circumstances, such as the marketconditions experienced in 2008 and early 2009, previously uncorrelated indicators may becomecorrelated, or previously correlated indicators may move in different directions. These types ofmarket movements have at times limited the effectiveness of our hedging strategies and have causedus to incur significant losses, and they may do so in the future. These changes in correlation canbe exacerbated where other market participants are using risk or trading models with assumptions oralgorithms that are similar to ours. In these and other cases, it may be difficult to reduce ourrisk positions due to the activity of other market participants or widespread market dislocations,including circumstances where asset values are declining significantly or no market exists forcertain assets. To the extent that we make investments directly in securities that do not have anestablished liquid trading market or are otherwise subject to restrictions on sale or hedging, wemay not be able to reduce our positions and therefore reduce our risk associated with suchpositions.For a further discussion of our market risk and our risk management policies and procedures, seeItem 7A — Quantitative and Qualitative Disclosures About Market Risk.*Our increased credit risk could result in higher credit losses and reduced earnings.*When we enterinto trading positions, loan money, commit to loan money or enter into a letter of credit or othercontract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do notrepay their loans or our counterparties fail to perform according to the terms of their agreements.A number of our products expose us to credit risk, including trading positions, derivatives,including credit default swaps, loans, and lending commitments.
 
 

 
We estimate and establish reserves or make credit valuation adjustments for credit risks and creditlosses inherent in our credit exposure (including unfunded lending commitments). This process,which is critical to our financial results and condition, requires difficult, subjective andcomplex judgments, including forecasts of economic conditions and how our borrowers andcounterparties will react to these conditions. The ability of our borrowers to repay their loans orcounterparties to honor their obligations will likely be affected by changes in economicconditions, which in turn could impact the accuracy of our forecasts. As with any such assessments,there is also the chance that we will fail to identify the proper factors or that we will fail toaccurately estimate the impacts of factors that we identify.In the ordinary course of our business, we also may be subject to a concentration of credit risk toa particular industry, counterparty, borrower or issuer. A deterioration in the financial conditionor prospects of a particular industry or a failure or downgrade of, or default by, any particularentity or group of entities could negatively impact our businesses, perhaps materially, and thesystems by which we set limits and monitor the level of our credit exposure to individual entities,industries and countries may not function as we have anticipated. While our activities expose us tomany different industries and counterparties, we routinely execute a high volume of transactionswith counterparties in the financial services industry, including brokers and dealers, commercialbanks, investment funds and insurers, including financial guarantors. This has resulted insignificant credit concentration with respect to this industry.For a further discussion of credit risk, see “Concentrations of Credit Risk” in Note 4 to theConsolidated Financial Statements.*Our ability to successfully identify and manage our compliance and other risks is an importantfactor that can significantly impact our results.*We seek to monitor and control our risk exposurethrough a variety of separate but complementary financial, credit, operational, compliance andlegal reporting systems. While we employ a broad and diversified set of risk monitoring and riskmitigation techniques, those techniques and the judgments that accompany their application cannotanticipate every economic and financial outcome or the specifics and timing of such outcomes.Accordingly, our ability to successfully identify and manage risks facing us is an important factorthat can significantly impact our results. Recent economic conditions, increased legislative andregulatory scrutiny and increased complexity of our operations, among other things, have increasedand made it more difficult for us to manage our operational, compliance and other risks. For afurther discussion of our risk management policies and procedures, see Item 7A — Quantitative andQualitative Disclosures About Market Risk.*We may be unable to compete successfully as a result of the evolving financial services industryand market conditions.*We operate in a highly competitive environment. Over time, there has beensubstantial consolidation among companies in the financial services industry, and this trendaccelerated in 2008 and 2009 as the credit crisis has led to numerous mergers and assetacquisitions among industry participants and in certain cases reorganization, restructuring, oreven bankruptcy. This trend also has hastened the globalization of the securities and financialservices markets. We will continue to experience intense competition as continued consolidation inthe financial services industry may produce larger and better-capitalized companies that arecapable of offering a wider array of financial products and services at more competitive prices. Tothe extent we expand into new business areas and new geographic regions, we may face competitorswith more experience and more established relationships with clients, regulators and industryparticipants in the relevant market, which could adversely affect our ability to compete. Increasedcompetition may affect our results by creating pressure to lower prices on our products andservices and reducing market share.Our continued ability to compete effectively in our businesses, including management of ourexisting businesses as well as expansion into new businesses and geographic areas, depends on ourability to retain and motivate our existing employees and attract new employees. We facesignificant competition for qualified employees both within and outside the financial servicesindustry, including non-U.S. institutions and institutions not subject to compensation or hiringrestrictions imposed under any U.S. Government initiatives or not subject to the same regulatoryscrutiny. This is particularly the case in emerging markets, where we are often competing forqualified employees with entities that may have a significantly greater presence or more extensiveexperience in the region. A substantial portion of our annual bonus compensation paid to our senioremployees has in recent years been paid in the form of equity-based awards, which are now payablein Bank of America’s common stock. The value of these awards has been impacted by the significantdecline in the market price of Bank of America’s common stock. We also reduced the number ofemployees across nearly all of our businesses in 2008 and 2009. In addition, the consolidation inthe financial services industry has intensified the inherent challenges of cultural integrationbetween differing types of financial services institutions. The combination of these events couldhave a significant adverse impact on our ability to retain and hire the most qualified employees.
 
 

 
*We may be adversely impacted by business, economic and political conditions in thenon-U.S. jurisdictions in which we operate.*We do business throughout the world, including indeveloping regions of the world commonly known as emerging markets. As a result, we are exposed toa number of risks in non-U.S. jurisdictions, including economic, market, reputational, litigationand regulatory risks. Our businesses and revenues derived from non-U.S. jurisdictionsare subject to risk of loss from currency fluctuations, social or political instability, changes ingovernmental policies or policies of central banks, expropriation, nationalization, confiscation ofassets, unfavorable political and diplomatic developments and changes in legislation. Also, as inthe United States, many non-U.S. jurisdictions in which we do business have been negativelyimpacted by recessionary conditions. While a number of these jurisdictions are showing signs ofrecovery, others continue to experience increasing levels of stress. In addition, the risk ofdefault on sovereign debt in some non-U.S. jurisdictions is increasing and could expose us tolosses.In many countries, the laws and regulations applicable to the financial services industry areuncertain and evolving, and it may be difficult for us to determine the exact requirements of locallaws in every market or manage our relationships with multiple regulators in various jurisdictions.Our inability to remain in compliance with local laws in a particular market and manage ourrelationships with regulators could have a significant and negative effect not only on our businessin that market but also on our reputation generally.We also invest or trade in the securities of corporations and governments located innon-U.S. jurisdictions, including emerging markets. Revenues from the trading ofnon-U.S. securities may be subject to negative fluctuations as a result of the above factors.Furthermore, the impact of these fluctuations could be magnified, because generallynon-U.S. trading markets, particularly in emerging market countries, are smaller, less liquid andmore volatile than U.S. trading markets.We are subject to geopolitical risks, including acts or threats of terrorism, and actions taken bythe United States or other governments in response and/or military conflicts could adversely affectbusiness and economic conditions abroad as well as in the U.S.*Changes in governmental fiscal and monetary policy could adversely affect our business.*Ourbusinesses and earnings are affected by domestic and international fiscal and monetary policy. Forexample, the Federal Reserve Board regulates the supply of money and credit in the United Statesand its policies determine in large part our cost of funds for lending, investing and capitalraising activities and the return we earn on those loans and investments, both of which affect ournet interest profit. The actions of the Federal Reserve Board also can materially affect the valueof financial instruments we hold, such as debt securities, and its policies also can affect ourborrowers, potentially increasing the risk that they may fail to repay their loans. Our businessesand earnings also are affected by the fiscal or other policies that are adopted by variousregulatory authorities of the U.S., non-U.S. governments and international agencies. Changes indomestic and international fiscal and monetary policies are beyond our control and difficult topredict.*We may suffer losses as a result of operational risk or technical system failures.*The potentialfor operational risk exposure exists throughout our organization. Integral to our performance isthe continued efficacy of our internal processes, systems, relationships with third parties and thevast array of employees and key executives in our day-to-day and ongoing operations. Operationalrisk also encompasses the failure to implement strategic objectives in a successful, timely andcost-effective manner.Failure to properly manage operational risk subjects us to risks of loss that may vary in size,scale and scope, including loss of clients. This also includes but is not limited to operational ortechnical failures, unlawful tampering with our technical systems, ineffectiveness or exposure dueto interruption in third party support, the loss of key individuals or failure on the part of thekey individuals to perform properly and losses resulting from unauthorized trading activity by ouremployees.*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, banking and non-banking subsidiaries. We thereforedepend on dividends, distributions and borrowings or other payments from our subsidiaries and maydepend in large part on financing from Bank of America to fund payments on our obligations,including debt obligations. Bank of America may in some instances, because of its regulatoryrequirements as a bank holding company, be unable to provide us with the funding we need to fundpayments on our obligations. Many of our subsidiaries are subject to laws that authorize regulatoryagencies to block or reduce the flow of funds from those subsidiaries to us. Regulatory action ofthat kind could impede access to funds we need to make payments on our obligations.