Bank of America 2013 Annual Report Download - page 164

162 Bank of America 2013
acquired or divested the power to direct the activities of the VIE
through changes in governing documents or other circumstances.
The reassessment also considers whether the Corporation has
acquired or disposed of a financial interest that could be significant
to the VIE, or whether an interest in the VIE has become significant
or is no longer significant. The consolidation status of the VIEs
with which the Corporation is involved may change as a result of
such reassessments. Changes in consolidation status are applied
prospectively, with assets and liabilities of a newly consolidated
VIE initially recorded at fair value. A gain or loss may be recognized
upon deconsolidation of a VIE depending on the carrying values
of deconsolidated assets and liabilities compared to the fair value
of retained interests and ongoing contractual arrangements.
The Corporation primarily uses VIEs for its securitization
activities, in which the Corporation transfers whole loans or debt
securities into a trust or other vehicle such that the assets are
legally isolated from the creditors of the Corporation. Assets held
in a trust can only be used to settle obligations of the trust. The
creditors of these trusts typically have no recourse to the
Corporation except in accordance with the Corporation’s
obligations under standard representations and warranties.
When the Corporation is the servicer of whole loans held in a
securitization trust, including non-agency residential mortgages,
home equity loans, credit cards, automobile loans and student
loans, the Corporation has the power to direct the most significant
activities of the trust. The Corporation does not have the power
to direct the most significant activities of a residential mortgage
agency trust unless the Corporation holds substantially all of the
issued securities and has the unilateral right to liquidate the trust.
The power to direct the most significant activities of a commercial
mortgage securitization trust is typically held by the special
servicer or by the party holding specific subordinate securities
which embody certain controlling rights. The Corporation
consolidates a whole-loan securitization trust if it has the power
to direct the most significant activities and also holds securities
issued by the trust or has other contractual arrangements, other
than standard representations and warranties, that could
potentially be significant to the trust.
The Corporation may also transfer trading account securities
and AFS securities into municipal bond or resecuritization trusts.
The Corporation consolidates a municipal bond or resecuritization
trust if it has control over the ongoing activities of the trust such
as the remarketing of the trust’s liabilities or, if there are no ongoing
activities, sole discretion over the design of the trust, including
the identification of securities to be transferred in and the structure
of securities to be issued, and also retains securities or has
liquidity or other commitments that could potentially be significant
to the trust. The Corporation does not consolidate a municipal
bond or resecuritization trust if one or a limited number of third-
party investors share responsibility for the design of the trust or
have control over the significant activities of the trust through
liquidation or other substantive rights.
Other VIEs used by the Corporation include collateralized debt
obligations (CDOs), investment vehicles created on behalf of
customers and other investment vehicles. The Corporation does
not routinely serve as collateral manager for CDOs and, therefore,
does not typically have the power to direct the activities that most
significantly impact the economic performance of a CDO. However,
following an event of default, if the Corporation is a majority holder
of senior securities issued by a CDO and acquires the power to
manage the assets of the CDO, the Corporation consolidates the
CDO.
The Corporation consolidates a customer or other investment
vehicle if it has control over the initial design of the vehicle or
manages the assets in the vehicle and also absorbs potentially
significant gains or losses through an investment in the vehicle,
derivative contracts or other arrangements. The Corporation does
not consolidate an investment vehicle if a single investor controlled
the initial design of the vehicle or manages the assets in the
vehicles or if the Corporation does not have a variable interest
that could potentially be significant to the vehicle.
Retained interests in securitized assets are initially recorded
at fair value. In addition, the Corporation may invest in debt
securities issued by unconsolidated VIEs. Fair values of these debt
securities, which are AFS debt securities or trading account assets,
are based primarily on quoted market prices in active or inactive
markets. Generally, quoted market prices for retained residual
interests are not available; therefore, the Corporation estimates
fair values based on the present value of the associated expected
future cash flows. This may require management to estimate credit
losses, prepayment speeds, forward interest yield curves, discount
rates and other factors that impact the value of retained interests.
Retained residual interests in unconsolidated securitization trusts
are classified in trading account assets or other assets with
changes in fair value recorded in income. The Corporation may
also enter into derivatives with unconsolidated VIEs, which are
carried at fair value with changes in fair value recorded in income.
Fair Value
The Corporation measures the fair values of its financial
instruments in accordance with accounting guidance that requires
an entity to base fair value on exit price. A three-level hierarchy,
provided in the applicable accounting guidance, for inputs is
utilized in measuring fair value which maximizes the use of
observable inputs and minimizes the use of unobservable inputs
by requiring that observable inputs be used to determine the exit
price when available. Under applicable accounting guidance, the
Corporation categorizes its financial instruments, based on the
priority of inputs to the valuation technique, into this three-level
hierarchy, as described below. Trading account assets and
liabilities, derivative assets and liabilities, AFS debt and equity
securities, other debt securities carried at fair value, certain MSRs
and certain other assets are carried at fair value in accordance
with applicable accounting guidance. The Corporation has also
elected to account for certain assets and liabilities under the fair
value option, including certain commercial and consumer loans
and loan commitments, LHFS, other short-term borrowings,
securities financing agreements, asset-backed secured
financings, long-term deposits and long-term debt. The following
describes the three-level hierarchy.
Level 1 Unadjusted quoted prices in active markets for identical
assets or liabilities. Level 1 assets and liabilities include
debt and equity securities and derivative contracts that
are traded in an active exchange market, as well as
certain U.S. Treasury securities that are highly liquid and
are actively traded in OTC markets.
Level 2 Observable inputs other than Level 1 prices, such as
quoted prices for similar assets or liabilities, quoted
prices in markets that are not active, or other inputs that
are observable or can be corroborated by observable
market data for substantially the full term of the assets
or liabilities. Level 2 assets and liabilities include debt