Bank of America 2007 Annual Report Download - page 64

collateralized by projected cash flows from long-term contracts (e.g., tele-
vision broadcast contracts, stadium revenues and royalty payments)
which, as mentioned above, incorporate features that provide credit sup-
port at a level equivalent to an investment grade. At December 31, 2007,
the weighted average life of assets in the consolidated conduit was 5.4
years and the weighted average maturity of commercial paper issued by
this conduit was 40 days. Assets of the Corporation are not available to
pay creditors of the consolidated conduit except to the extent the Corpo-
ration may be obligated to perform under the liquidity commitments and
SBLCs. Assets of the consolidated conduit are not available to pay cred-
itors of the Corporation.
We do not consolidate the other two conduits as we do not expect to
absorb a majority of the variability of the conduits. At December 31, 2007,
our liquidity commitments to the unconsolidated conduits were collateral-
ized by student loans (27 percent), credit card loans and trade receivables
(10 percent each), and auto loans (eight percent). Less than one percent
of these assets are subprime residential mortgages. In addition, 29 per-
cent of our commitments were collateralized by the conduits’ short-term
lending arrangements with investment funds, primarily real estate funds,
which as mentioned above, incorporate features that provide credit sup-
port at a level equivalent to an investment grade. Amounts advanced
under these arrangements will be repaid when the investment funds issue
capital calls to their qualified equity investors. At December 31, 2007, the
weighted average life of assets in the unconsolidated conduits was 2.6
years and the weighted average maturity of commercial paper issued by
these conduits was 36 days.
The liquidity commitments and SBLCs provided to unconsolidated
conduits are included in Table 10 in the Obligations and Commitments
section beginning on page 63. We have no other contractual obligations to
the unconsolidated conduits, nor do we intend to provide noncontractual
or other forms of support.
On a combined basis, the unconsolidated conduits issued approx-
imately $27 million of capital notes and equity interests to third parties.
This represents the maximum amount of loss that would be absorbed by
the third party investors. Based on an analysis of projected cash flows, we
have determined that the Corporation will not absorb a majority of the
variability created by the assets of the conduits.
Despite the market disruptions in the second half of 2007, the con-
duits did not experience any material difficulties in issuing commercial
paper. The Corporation did not purchase any commercial paper issued by
the conduits other than incidentally and in its role as commercial paper
dealer.
Municipal Bond Trusts and Corporate SPEs
We have provided a total of $17.7 billion and $7.9 billion in liquidity sup-
port to municipal bond trusts and corporate SPEs at December 31, 2007
and 2006. We administer municipal bond trusts that hold highly-rated,
long-term, fixed-rate municipal bonds, some of which are callable prior to
maturity, for which we provided liquidity support of $13.4 billion and $2.6
billion at December 31, 2007 and 2006. In addition, we administer sev-
eral conduits to which we provided $4.3 billion and $5.3 billion of liquidity
support at December 31, 2007 and 2006.
As it relates to the municipal bond trusts the weighted average
remaining life of the bonds at December 31, 2007 was 20.8 years. Sub-
stantially all of the bonds are rated AAA or AA and some of the bonds
benefit from being wrapped by monolines. There were no material write-
downs or downgrades of assets or issuers during 2007. The trusts obtain
financing by issuing floating-rate trust certificates that reprice on a weekly
basis to third party investors. The floating-rate investors have the right to
tender the certificates at any time upon seven days notice. We serve as
remarketing agent and liquidity provider for the trusts. Should we be
unable to remarket the tendered certificates, we are generally obligated to
purchase them at par. We are not obligated to purchase the certificate if a
bond’s credit rating declines below investment grade or in the event of
certain defaults or bankruptcy of the issuer and/or insurer. The total
notional amount of floating-rate certificates for which we provide liquidity
support was $13.4 billion and $2.6 billion at December 31, 2007 and
2006. Some of these trusts are QSPEs. We consolidate those trusts that
are not QSPEs if we hold the residual interest or otherwise expect to
absorb a majority of the variability of the trusts. We have $6.1 billion of
liquidity commitments to unconsolidated trusts at December 31, 2007,
which are included in Table 10 in the Obligations and Commitments sec-
tion beginning on page 63.
Assets of the other corporate conduits consisted primarily of high-
grade, long-term municipal, corporate, and mortgage-backed securities
which had a weighted average remaining life of approximately 7.5 years at
December 31, 2007. Substantially all of the securities are rated AAA or AA
and some of the bonds benefit from being wrapped by monolines. There
were no material write-downs or downgrades of assets or insurers during
2007. These conduits, which are QSPEs, obtain funding by issuing com-
mercial paper to third party investors. At December 31, 2007, the
weighted average maturity of the commercial paper was 25 days. We have
entered into derivative contracts which provide interest rate, currency and
a pre-specified amount of credit protection to the entities in exchange for
the commercial paper rate. In addition, we may be obligated to purchase
assets from the vehicles if the assets or insurers are downgraded. If an
asset’s rating declines below a certain investment quality as evidenced by
its credit rating or defaults, we are no longer exposed to the risk of loss.
Due to the market disruptions during the second half of 2007, these
conduits began to experience difficulties in issuing commercial paper as
credit spreads widened. On occasion, including in the first quarter of
2008, we held some of the issued commercial paper when marketing
attempts were unsuccessful. In the event that we are unable to remarket
the conduits’ commercial paper such that it no longer qualifies as a QSPE,
we would consolidate the conduit which may have an adverse impact on
the fair value of the related derivative contracts. At December 31, 2007
we did not hold any commercial paper issued by the conduits.
We have no other contractual obligations to the unconsolidated bond
trusts and conduits described above, nor do we intend to provide non-
contractual or other forms of support.
Derivative activity related to these entities is included in Note 4 –
Derivatives to the Consolidated Financial Statements. For more
information on QSPEs, see Note 9 – Variable Interest Entities to the Con-
solidated Financial Statements. For additional information on our monoline
exposure, see Industry Concentrations beginning on page 79.
Collateralized Debt Obligation Vehicles
CDOs are SPEs that hold diversified pools of fixed income securities. They
issue multiple tranches of debt securities, including commercial paper and
equity securities. We receive fees for structuring the CDOs and/or placing
debt securities with third party investors. We provided total liquidity sup-
port of $12.3 billion and $7.7 billion at December 31, 2007 and 2006
consisting of $10.0 billion and $2.1 billion of written put options and $2.3
billion and $5.5 billion of other forms of liquidity support.
At December 31, 2007 and 2006, we provided liquidity support in
the form of written put options on $10.0 billion and $2.1 billion of
commercial paper issued by CDOs, including $3.2 billion issued by a
consolidated CDO at December 31, 2007. No third parties provide similar
62 Bank of America 2007