Bank of America 2008 Annual Report Download - page 156

Other Commitments
Principal Investing and Other Equity Investments
At December 31, 2008 and 2007, the Corporation had unfunded equity
investment commitments of approximately $1.9 billion and $2.6 bil-
lion. These commitments relate primarily to the Corporation’s Principal
Investing business, which is comprised of a diversified portfolio of
investments in privately held and publicly traded companies at all stages
of their life cycle from start-up to buyout. These investments are made
either directly in a company or held through a fund and are accounted for
at fair value. Bridge equity commitments provide equity bridge financing to
facilitate clients’ investment activities. These conditional commitments
are often retired prior to or shortly following funding via syndication or the
client’s decision to terminate. Where the Corporation has a binding equity
bridge commitment and there is a market disruption or other unexpected
event, there is heightened exposure in the portfolio and higher potential
for loss, unless an orderly disposition of the exposure can be made. At
December 31, 2008, the Corporation did not have any unfunded bridge
equity commitments and had previously funded $1.2 billion of equity
bridges which are considered held for investment and recorded in other
assets at $670 million. During 2008, the Corporation recorded $545 mil-
lion in losses related to these investments through equity investment
income.
Loan Purchases
At December 31, 2008, the Corporation had no collateralized mortgage
obligation loan purchase commitments related to its ALM activities
compared to $752 million at December 31, 2007, all of which settled in
the first quarter of 2008.
In 2005, the Corporation entered into an agreement for the committed
purchase of retail automotive loans over a five-year period, ending
June 30, 2010. The Corporation purchased $12.0 billion of such loans
under this agreement in 2008 compared to $4.5 billion of such loans in
2007. As of December 31, 2008, the Corporation was committed for
additional purchases of up to $13.0 billion over the remaining term of the
agreement of which $3.0 billion will be purchased by June 30, 2009. All
loans purchased under this agreement are subject to a comprehensive
set of credit criteria. This agreement is accounted for as a derivative
liability which had a balance of $316 million and $129 million at
December 31, 2008 and 2007.
Operating Leases
The Corporation is a party to operating leases for certain of its premises
and equipment. Commitments under these leases approximate $2.3 bil-
lion, $2.1 billion, $1.8 billion, $1.5 billion and $1.2 billion for 2009
through 2013, respectively, and $8.3 billion for all years thereafter.
Other Commitments
Beginning in the second half of 2007, the Corporation provided support to
certain cash funds managed within GWIM. The funds for which the Corpo-
ration provided support typically invested in high quality, short-term secu-
rities with a portfolio weighted average maturity of 90 days or less,
including securities issued by SIVs and senior debt holdings of financial
service companies. Due to market disruptions, certain investments in
SIVs and senior debt securities were downgraded by the rating agencies
and experienced a decline in fair value. The Corporation entered into capi-
tal commitments, under which the Corporation provided cash to these
funds in the event the net asset value per unit of a fund declined below
certain thresholds. The capital commitments expire no later than the third
quarter of 2010. At December 31, 2008 and 2007, the Corporation had
gross (i.e., funded and unfunded) capital commitments to the funds of
$1.0 billion and $565 million. In 2008, the Corporation incurred losses of
$695 million related to these capital commitments. At December 31,
2008 and 2007, the remaining loss exposure on capital commitments
was $300 million and $183 million. Additionally, during 2008, the Corpo-
ration purchased $1.7 billion of investments from the funds and recorded
losses of $418 million.
The Corporation may from time to time, but is under no obligation to,
provide additional support to funds managed within GWIM. Future sup-
port, if any, may take the form of additional capital commitments to the
funds or the purchase of assets from the funds.
The Corporation does not consolidate the cash funds managed within
GWIM because the subordinated support provided by the Corporation will
not absorb a majority of the variability created by the assets of the funds.
In reaching this conclusion, the Corporation considered both interest rate
and credit risk. The cash funds had total assets under management of
$185.9 billion and $189.5 billion at December 31, 2008 and 2007.
Other Guarantees
Employee Retirement Protection
The Corporation sells products that offer book value protection primarily
to plan sponsors of Employee Retirement Income Security Act of 1974
(ERISA) governed pension plans, such as 401(k) plans and 457 plans.
The book value protection is provided on portfolios of intermediate/short-
term investment-grade fixed income securities and is intended to cover
any shortfall in the event that plan participants withdraw funds when
market value is below book value. The Corporation retains the option to
exit the contract at any time. If the Corporation exercises its option, the
purchaser can require the Corporation to purchase zero-coupon bonds
with the proceeds of the liquidated assets to assure the return of princi-
pal. To manage its exposure, the Corporation imposes significant
restrictions and constraints on the timing of the withdrawals, the manner
in which the portfolio is liquidated and the funds are accessed, and the
investment parameters of the underlying portfolio. These constraints,
combined with structural protections, are designed to provide adequate
buffers and guard against payments even under extreme stress scenar-
ios. These guarantees are booked as derivatives and marked to market in
the trading portfolio. At December 31, 2008 and 2007, the notional
amount of these guarantees totaled $42.2 billion and $35.2 billion with
estimated maturity dates between 2009 and 2038. As of December 31,
2008 and 2007, the Corporation has not made a payment under these
products and has assessed the probability of payments under these
guarantees as remote.
Written Put Options
At December 31, 2008 and 2007, the Corporation provided liquidity
support in the form of written put options on $542 million and $10.0 bil-
lion of commercial paper issued by CDOs, all of which were issued by
unconsolidated CDOs at December 31, 2008. The commercial paper is
the most senior class of securities issued by the CDOs and benefits from
the subordination of all other securities, including AAA-rated securities,
issued by the CDOs. The Corporation is obligated under the written put
options to provide funding to the CDOs by purchasing the commercial
paper at predetermined contractual yields in the event of a severe dis-
ruption in the short-term funding market. These agreements are expected
to be terminated in 2009. The underlying collateral in the CDOs includes
mortgage-backed securities, ABS, and CDO securities issued by other
154 Bank of America 2008