Bank of America 2005 Annual Report Download - page 163

BANK OF AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
contract language and the timing of the early termination clause. Historically, any payments made under these
guarantees have been de minimis. Management has assessed the probability of making such payments in the future as
remote.
The Corporation has entered into additional guarantee agreements, including lease end obligation agreements,
partial credit guarantees on certain leases, real estate joint venture guarantees, sold risk participation swaps and sold
put options that require gross settlement. The maximum potential future payment under these agreements was
approximately $1.8 billion and $2.1 billion at December 31, 2005 and 2004. The estimated maturity dates of these
obligations are between 2006 and 2033. The Corporation has made no material payments under these guarantees.
The Corporation provides credit and debit card processing services to various merchants, processing credit and debit
card transactions on their behalf. In connection with these services, a liability may arise in the event of a billing dispute
between the merchant and a cardholder that is ultimately resolved in the cardholder’s favor and the merchant defaults
upon its obligation to reimburse the cardholder. A cardholder, through its issuing bank, generally has until the later of
up to four months after the date a transaction is processed or the delivery of the product or service to present a
chargeback to the Corporation as the merchant processor. If the Corporation is unable to collect this amount from the
merchant, it bears the loss for the amount paid to the cardholder. In 2005 and 2004, the Corporation processed $352.9
billion and $143.1 billion of transactions and recorded losses as a result of these chargebacks of $13 million and $6
million.
At December 31, 2005 and 2004, the Corporation held as collateral approximately $248 million and $203 million of
merchant escrow deposits which the Corporation has the right to set off against amounts due from the individual
merchants. The Corporation also has the right to offset any payments with cash flows otherwise due to the merchant.
Accordingly, the Corporation believes that the maximum potential exposure is not representative of the actual potential
loss exposure. The Corporation believes the maximum potential exposure for chargebacks would not exceed the total
amount of merchant transactions processed through Visa and MasterCard for the last four months, which represents the
claim period for the cardholder, plus any outstanding delayed-delivery transactions. As of December 31, 2005 and 2004,
the maximum potential exposure totaled approximately $118.2 billion and $93.4 billion.
Within the Corporation’s brokerage business, the Corporation has contracted with a third party to provide clearing
services that include underwriting margin loans to the Corporation’s clients. This contract stipulates that the
Corporation will indemnify the third party for any margin loan losses that occur in their issuing margin to the
Corporation’s clients. The maximum potential future payment under this indemnification was $1.1 billion and $1.2
billion at December 31, 2005 and 2004. Historically, any payments made under this indemnification have been
immaterial. As these margin loans are highly collateralized by the securities held by the brokerage clients, the
Corporation has assessed the probability of making such payments in the future as remote. This indemnification would
end with the termination of the clearing contract.
For additional information on recourse obligations related to residential mortgage loans sold and other guarantees
related to securitizations, see Note 9 of the Consolidated Financial Statements.
Litigation and Regulatory Matters
In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to many
pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of
claimants. Certain of these actions and proceedings are based on alleged violations of consumer protection, securities,
environmental, banking, employment and other laws. In certain of these actions and proceedings, claims for substantial
monetary damages are asserted against the Corporation and its subsidiaries.
In the ordinary course of business, the Corporation and its subsidiaries are also subject to regulatory examinations,
information gathering requests, inquiries and investigations. Certain subsidiaries of the Corporation are registered
broker/dealers or investment advisors and are subject to regulation by the SEC, the National Association of Securities
Dealers, the New York Stock Exchange and state securities regulators. In connection with formal and informal inquiries
by those agencies, such subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and
information in connection with various aspects of their regulated activities.
In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly
where the claimants seek very large or indeterminate damages or where the cases present novel legal theories or involve
a large number of parties, the Corporation cannot state with confidence what the eventual outcome of the pending
matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or
penalties related to each pending matter may be.
127