Bank of America 2011 Annual Report Download - page 217

Bank of America 2011 215
The Corporation has entered into agreements with providers of
market data, communications, systems consulting and other
office-related services. At December 31, 2011 and 2010, the
minimum fee commitments over the remaining terms of these
agreements totaled $1.9 billion and $2.1 billion.
Other Guarantees
Bank-owned Life Insurance Book Value Protection
The Corporation sells products that offer book value protection to
insurance carriers who offer group life insurance policies to
corporations, primarily banks. The book value protection is
provided on portfolios of intermediate investment-grade fixed-
income securities and is intended to cover any shortfall in the
event that policyholders surrender their policies and market value
is below book value. To manage its exposure, the Corporation
imposes significant restrictions on surrenders and the manner in
which the portfolio is liquidated and the funds are accessed. In
addition, investment parameters of the underlying portfolio are
restricted. These constraints, combined with structural
protections, including a cap on the amount of risk assumed on
each policy, are designed to provide adequate buffers and guard
against payments even under extreme stress scenarios. These
guarantees are recorded as derivatives and carried at fair value
in the trading portfolio. At both December 31, 2011 and 2010,
the notional amount of these guarantees totaled $15.8 billion and
the Corporation’s maximum exposure related to these guarantees
totaled $5.1 billion and $5.0 billion with estimated maturity dates
between 2030 and 2040. As of December 31, 2011, the
Corporation had not made a payment under these products. The
possibility of surrender or other payment associated with these
guarantees exists. The net fair value of the liability associated with
these guarantees was $48 million and $78 million at December
31, 2011 and 2010 and reflects the probability of surrender as
well as the multiple structural protection features in the contracts.
Employee Retirement Protection
The Corporation sells products that offer book value protection
primarily to plan sponsors of the 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 continue to withdraw funds after all
securities have been liquidated and there is remaining 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 high-quality fixed-income securities,
typically government or government-backed agency securities, with
the proceeds of the liquidated assets to assure the return of
principal. 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 scenarios. These
guarantees are recorded as derivatives and carried at fair value
in the trading portfolio. At December 31, 2011 and 2010, the
notional amount of these guarantees totaled $28.8 billion and
$33.8 billion with estimated maturity dates up to 2015 if the exit
option is exercised on all deals. As of December 31, 2011, the
Corporation had not made a payment under these products.
Indemnifications
In the ordinary course of business, the Corporation enters into
various agreements that contain indemnifications, such as tax
indemnifications, whereupon payment may become due if certain
external events occur, such as a change in tax law. The
indemnification clauses are often standard contractual terms and
were entered into in the normal course of business based on an
assessment that the risk of loss would be remote. These
agreements typically contain an early termination clause that
permits the Corporation to exit the agreement upon these events.
The maximum potential future payment under indemnification
agreements is difficult to assess for several reasons, including
the occurrence of an external event, the inability to predict future
changes in tax and other laws, the difficulty in determining how
such laws would apply to parties in contracts, the absence of
exposure limits contained in standard contract language and the
timing of the early termination clause. Historically, any payments
made under these guarantees have been de minimis. The
Corporation has assessed the probability of making such
payments in the future as remote.
Merchant Services
During 2009, the Corporation contributed its merchant services
business to a joint venture in exchange for a 46.5 percent
ownership interest in the joint venture. In 2010, the joint venture
purchased the interest held by one of the three initial investors
bringing the Corporation’s ownership interest up to 49 percent.
For additional information on the joint venture agreement, see Note
5 – Securities.
In accordance with credit and debit card association rules, the
Corporation sponsors merchant processing servicers that process
credit and debit card transactions on behalf of various merchants.
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. If the merchant
defaults on its obligation to reimburse the cardholder, the
cardholder, through its issuing bank, generally has until six months
after the date of the transaction to present a chargeback to the
merchant processor, which is primarily liable for any losses on
covered transactions. However, if the merchant processor fails to
meet its obligation to reimburse the cardholder for disputed
transactions, then the Corporation, as the sponsor, could be held
liable for the disputed amount. In 2011 and 2010, the sponsored
entities processed and settled $460.4 billion and $339.4 billion
of transactions and recorded losses of $11 million and $17 million.
At December 31, 2011 and 2010, the Corporation held as
collateral $238 million and $25 million of merchant escrow
deposits which may be used to offset amounts due from the
individual merchants.
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, MasterCard and Discover
for the last six months, which represents the claim period for the
cardholder, plus any outstanding delayed-delivery transactions. As
of December 31, 2011 and 2010, the maximum potential exposure
for sponsored transactions totaled approximately $236.0 billion