Exhibit 99.1
Item 1A. Risk Factors
In the course of conducting our business operations, we are exposed to a variety
of risks that are inherent to the financial services industry. The following
discusses some of the key inherent risk factors that could affect our business
and operations, as well as other risk factors which are particularly relevant to
us in the current period of significant economic and market disruption. Other
factors besides those discussed below or elsewhere in this report also could
adversely affect our business and operations, and these risk factors should not
be considered a complete list of potential risks that may affect us.
Business and Economic Conditions
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Our businesses and earnings are affected by general business and economic
conditions in the United States and abroad. General business and economic
conditions that could affect us include the level and volatility of short-term
and long-term interest rates, inflation, home prices, employment levels,
bankruptcies, household income, consumer spending, fluctuations in both debt
and equity capital markets, liquidity of the global financial markets, the
availability and cost of credit, investor confidence, and the strength of the
U.S. economy and the local economies in which we operate.
Economic conditions in the United States and abroad deteriorated significantly
during the second half of 2008, and the United States, Europe and Japan
currently are in a recession. Dramatic declines in the housing market, with
falling home prices and increasing foreclosures, unemployment and
under-employment, have negatively impacted the credit performance of mortgage
loans and resulted in significant write-downs of asset values by financial
institutions, including government sponsored entities as well as major
commercial and investment banks. These write-downs, initially of mortgage-backed
securities but spreading to credit default swaps and other derivatives and
cash securities, in turn, have caused many financial institutions to seek
additional capital, to merge with larger and stronger institutions and, in some
cases, to fail. Many lenders and institutional investors have reduced or ceased
providing funding to borrowers, including to other financial institutions,
reflecting concern about the stability of the financial markets generally
and the strength of counterparties. This market turmoil and tightening of
credit have led to an increased level of commercial and consumer delinquencies,
a significant reduction in consumer confidence, increased market volatility and
widespread reduction of business activity generally. The resulting economic
pressure on consumers and lack of confidence in the financial markets has
adversely affected our business, financial condition, results of operations,
liquidity and access to capital and credit. We do not expect that the difficult
conditions in the United States and international financial markets are likely
to improve in the near future. A worsening of these conditions would likely
exacerbate the adverse effects of these difficult market conditions on us and
others in the financial institutions industry.
Instability of the U.S. Financial System
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Beginning in the fourth quarter of 2008, the U.S. government has responded to
the ongoing financial crisis and economic slowdown by enacting new legislation
and expanding or establishing a number of programs and initiatives. Each of the
U.S. Treasury, the FDIC and the Federal Reserve Board have developed programs
and facilities, including, among others, the U.S. Treasury's Troubled Asset
Relief Program ("TARP") Capital Purchase Program and other efforts designed to
increase inter-bank lending, improve funding for consumer receivables and
restore consumer and counterparty confidence in the banking sector. In addition,
Congress recently passed the American Recovery and Reinvestment Act of 2009
(the "ARRA"), legislation intended to expand and establish government spending
programs and provide tax cuts to stimulate the economy. Congress and the
U.S. government continue to evaluate and develop various programs and
initiatives designed to stabilize the financial and housing markets and
stimulate the economy, including the U.S. Treasury's recently announced
Financial Stability Plan and the U.S. government's recently announced
foreclosure prevention program. The final form of any such programs or
initiatives or related legislation cannot be known at this time. There can be no
assurance as to the impact that ARRA, the Financial Stability Plan or any other
such initiatives or governmental programs will have on the financial markets,
including the extreme levels of volatility and limited credit availability
currently being experienced. The failure of these efforts to stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit, or the trading price of our
debt securities (including trust preferred securities).
International Risk
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We do business throughout the world, including in developing regions of the
world commonly known as emerging markets, and as a result, are exposed to a
number of risks, including economic, market, reputational, litigation and
regulatory risks, in non-U.S. markets. Our businesses and revenues derived from
non-U.S. operations are subject to risk of loss from currency fluctuations,
social or political instability, changes in governmental policies or policies
of central banks, expropriation, nationalization, confiscation of assets,
unfavorable political and diplomatic developments and changes in legislation
relating to non-U.S. ownership. We also invest or trade in the securities of
corporations located in non-U.S. jurisdictions, including emerging markets.
Revenues from the trading of non-U.S. securities also may be subject to negative
fluctuations as a result of the above factors. The impact of these fluctuations
could be magnified, because generally non-U.S. trading markets, particularly in
emerging market countries, are smaller, less liquid and more volatile than U.S.
trading markets.
Soundness of Other Financial Institutions
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Our ability to engage in routine trading and funding transactions could be
adversely affected by the actions and commercial soundness of other financial
institutions. Financial services institutions are interrelated as a result of
trading, clearing, funding, counterparty or other relationships. We have
exposure to many different industries and counterparties, and we routinely
execute transactions with counterparties in the financial industry, including
brokers and dealers, commercial banks, investment banks, mutual and hedge funds,
and other institutional clients. As a result, defaults by, or even rumors or
questions about the financial condition of, one or more financial services
institutions, or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or defaults by us or by
other institutions. Many of these transactions expose us to credit risk in the
event of default of our counterparty or client, and our results of operations
in 2007 and 2008 have been materially affected by the credit valuation
adjustments described in Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - U.S. ABS CDO and Other
Mortgage-Related Activities - Monoline Financial Guarantors." In addition, our
credit risk may be exacerbated when the collateral held by us cannot be realized
or is liquidated at prices not sufficient to recover the full amount of the loan
or derivative exposure due to us. There is no assurance that any such losses
would not materially and adversely affect our future results of operations.
We are party to a large number of derivative transactions, including credit
derivatives. Many of these derivative instruments are individually negotiated
and non-standardized, which can make exiting, transferring or settling the
position difficult. Many credit derivatives require that we deliver to the
counterparty the underlying security, loan or other obligation in order to
receive payment. In a number of cases, we do not hold, and may not be able to
obtain, the underlying security, loan or other obligation. This could cause us
to forfeit the payments due to us under these contracts or result in settlement
delays with the attendant credit and operational risk as well as increased
costs to us.
Derivative contracts and other transactions entered into with third parties are
not always confirmed by the counterparties on a timely basis. While the
transaction remains unconfirmed, we are subject to heightened credit and
operational risk and in the event of default may find it more difficult to
enforce the contract. In addition, as new and more complex derivative products
have been created, covering a wider array of underlying credit and other
instruments, disputes about the terms of the underlying contracts may arise,
which could impair our ability to effectively manage our risk exposures from
these products and subject us to increased costs.
Access to Funds From Subsidiaries and Parent
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We are a holding company that is a separate and distinct legal entity from its
parent, Bank of America, and our broker-dealer, banking and nonbanking
subsidiaries. We therefore depend on dividends, distributions and other payments
from our broker-dealer, banking and nonbanking subsidiaries and borrowings and
will depend in large part on financing from Bank of America to fund payments on
our obligations, including debt obligations. Bank of America may in some
instances, because of its regulatory requirements as a bank holding company, be
unable to provide us with funding we need to fund payments on our obligations.
Many of our subsidiaries are subject to laws that authorize regulatory bodies to
block or reduce the flow of funds from those subsidiaries to us. Regulatory
action of that kind could impede access to funds we need to make payments on our
obligations or dividend payments. In addition, our right to participate in a
distribution of assets upon a subsidiary's liquidation or reorganization is
subject to the prior claims of the subsidiary's creditors.
Changes in Accounting Standards
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Our accounting policies and methods are fundamental to how we record and
report our financial condition and results of operations. Some of these policies
require use of estimates and assumptions that may affect the value of our assets
or liabilities and financial results and are critical because they require
management to make difficult, subjective and complex judgments about matters
that are inherently uncertain. As a result of Bank of America's acquisition of
us, we may adopt different estimates and assumptions than those previously used
in order to align our estimates, assumptions and policies with those of Bank of
America. From time to time the Financial Accounting Standards Board ("FASB")and
the SEC change the financial accounting and reporting standards that govern the
preparation of our financial statements. In addition, accounting standard
setters and those who interpret the accounting standards (such as the FASB, the
SEC, banking regulators and our outside auditors) may change or even reverse
their previous interpretations or positions on how these standards should be
applied. These changes can be hard to predict and can materially impact how we
record and report our financial condition and results of operations. In some
cases, we could be required to apply a new or revised standard retroactively,
resulting in our restating prior period financial statements. For a further
discussion of some of our significant accounting policies and standards and
recent accounting changes, see Note 1 to the Consolidated Financial Statements.
Competition
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We operate in a highly competitive environment. Over time, there has been
substantial consolidation among companies in the financial services industry,
and this trend accelerated over the course of 2008 as the credit crisis has led
to numerous mergers and asset acquisitions among industry participants and in
certain cases reorganization, restructuring or even bankruptcy. This trend also
has hastened the globalization of the securities and financial services markets.
We will continue to experience intensified competition as continued
consolidation in the financial services industry in connection with current
market conditions may produce larger and better-capitalized companies that are
capable of offering a wider array of financial products and services at more
competitive prices. To the extent we expand into new business areas and new
geographic regions, we may face competitors with more experience and more
established relationships with clients, regulators and industry participants in
the relevant market, which could adversely affect our ability to compete.
Increased competition may affect our results by creating pressure to lower
prices on our products and services and reducing market share.
Our continued ability to compete effectively in our businesses, including
management of our existing businesses as well as expansion into new businesses
and geographic areas, depends on our ability to retain and motivate our existing
employees and attract new employees. We face significant competition for
qualified employees both within the financial services industry, including
foreign-based institutions and institutions not subject to compensation
restrictions imposed under the TARP Capital Purchase Program, the ARRA or any
other U.S. government initiatives, and from businesses outside the financial
services industry. This is particularly the case in emerging markets, where we
are often competing for qualified employees with entities that may have a
significantly greater presence or more extensive experience in the region.
Over the past year, we have significantly reduced compensation levels. In
January 2009, in connection with the U.S. Treasury's purchase of an additional
series of Bank of America's preferred stock, Bank of America agreed to certain
compensation limitations, and ARRA also includes certain additional
restrictions, applicable to its senior executive officers and certain other
senior managers. A substantial portion of the annual bonus compensation paid to
our senior employees has in recent years been paid in the form of equity-based
awards, which are now payable in Bank of America common stock. The value of
these awards has been impacted by the significant decline in the market price of
Bank of America's common stock. We also have reduced the number of employees
across nearly all of our businesses during 2008 and into 2009. In addition, the
recent consolidation in the financial services industry has intensified the
challenges of cultural integration between differing types of financial services
institutions. The combination of these events could have a significant adverse
impact on our ability to retain and hire the most qualified employees.
Credit Concentration Risk
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When we loan money, commit to loan money or enter into a letter of credit or
other contract with a counterparty, we incur credit risk, or the risk of losses
if our borrowers do not repay their loans or our counterparties fail to perform
according to the terms of their contracts. A number of our products expose us to
credit risk, including loans, leases and lending commitments, derivatives,
including credit default swaps,trading account assets and assets held-for-sale.
We estimate and establish reserves or make credit valuation adjustments for
credit risks and potential credit losses inherent in our credit exposure
(including unfunded credit commitments). This process, which is critical to our
financial results and condition, requires difficult, subjective and complex
judgments, including forecasts of economic conditions and how these economic
predictions might impair the ability of our borrowers to repay their loans or
counterparties to perform their obligations. As is the case with any such
assessments, there is always the chance that we will fail to identify the proper
factors or that we will fail to accurately estimate the impacts of factors that
we identify. Our ability to assess the credit worthiness of our counterparties
may be impaired if the models and approaches we use become less predictive of
future behaviors, valuations, assumptions or estimates.
We have experienced concentration of risk with respect to the mortgage markets,
including residential and commercial real estate, each of which represents a
significant percentage of our overall credit portfolio. The current financial
crisis and economic slowdown has adversely affected this concentration of risk.
These exposures will also continue to be impacted by external market factors
including default rates, a decline in the value of the underlying property,
rating agency actions, the prices at which observable market transactions occur
and the financial strength of counterparties, such as financial guarantors, with
whom we have economically hedged some of our exposure to these assets.
In the ordinary course of our business, we also may be subject to a
concentration of credit risk to a particular industry, counterparty, borrower or
issuer. A deterioration in the financial condition or prospects of a particular
industry or a failure or downgrade of, or default by, any particular entity or
group of entities could negatively impact our businesses, perhaps materially,
and the systems by which we set limits and monitor the level of our credit
exposure to individual entities, industries and countries may not function as we
have anticipated. While our activities expose us to many different industries
and counterparties, we routinely execute a high volume of transactions with
counterparties in the financial services industry, including brokers and
dealers, commercial banks, investment funds and insurers, including monolines
and other financial guarantors. This has resulted in significant credit
concentration with respect to this industry.
For a further discussion of credit risk, see "Concentrations of Credit Risk" in
Note 3 to the Consolidated Financial Statements.
Liquidity Risk
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Liquidity is essential to our businesses. Since we were acquired by Bank of
America, we established intercompany lending and borrowing arrangements with
Bank of America to facilitate centralized liquidity management and as a result,
our liquidity risk is derived in large part from Bank of America's liquidity
risk. Bank of America's liquidity could be impaired by an inability to access
the capital markets or by unforeseen outflows of cash, including deposits. This
situation may arise due to circumstances that Bank of America or we may be
unable to control, such as a general market disruption, negative views about the
financial services industry generally, or an operational problem that affects
third parties or us. Bank of America's ability to raise funding in the debt or
equity capital markets has been and could continue to be adversely affected by
conditions in the United States and international markets and economy. Global
capital and credit markets have been experiencing volatility and disruption
since the second half of 2007, and in the second half of 2008, volatility
reached unprecedented levels. In some cases, the markets have produced downward
pressure on stock prices and credit availability for issuers without regard to
those issuers' underlying financial strength. As a result of disruptions in the
credit markets, Bank of America and Merrill Lynch have utilized several of the
U.S. government's liquidity programs. Bank of America's ability and our ability
to borrow from other financial institutions or to engage in securitization
funding transactions on favorable terms or at all could be adversely affected
by further disruptions in the capital markets or other events, including actions
by rating agencies and deteriorating investor expectations.
Our credit ratings and Bank of America's credit ratings are important to our
liquidity. The ratings of Bank of America's long-term debt have been downgraded
during 2008 by all of the major rating agencies. These rating agencies
regularly evaluate Bank of America, us and our securities, and their ratings of
our long-term and short-term debt and other securities are based on a number of
factors, including Bank of America's and our financial strength as well as
factors not entirely within our control, including conditions affecting the
financial services industry generally. In light of the difficulties in the
financial services industry and the financial markets, there can be no assurance
that we will maintain our current ratings. Our failure to maintain those ratings
could adversely affect our liquidity and competitive position, increase
borrowing costs or limit access to the capital markets. While the impact on the
incremental cost of funds and potential lost funding of an incremental
downgrade of our long-term debt by one level might be negligible, a downgrade of
Bank of America's or our short-term credit rating could negatively impact our
commercial paper program by materially affecting our incremental cost of funds
and potential lost funding. A reduction in our credit ratings also could have a
significant impact on certain trading revenues, particularly in those businesses
where longer term counterparty performance is critical. In connection with
certain trading agreements, we may be required to provide additional collateral
in the event of a credit ratings downgrade.
For a further discussion of our liquidity position and other liquidity matters
and the policies and procedures we use to manage our liquidity risks, see
"Liquidity Risk" in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Market Risk
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We are directly and indirectly affected by changes in market conditions. Market
risk generally represents the risk that values of assets and liabilities or
revenues will be adversely affected by changes in market conditions. For
example, changes in interest rates could adversely affect our net interest
profit and principal transaction revenues (which we view together as our trading
revenues) - which could in turn affect our net earnings. Market risk is
inherent in the financial instruments associated with our operations and
activities including loans, deposits, securities, derivatives, short-term
borrowings and long-term debt. Just a few of the market conditions that may
shift from time to time, thereby exposing us to market risk, include
fluctuations in interest and currency exchange rates, equity and futures prices,
changes in the implied volatility of interest rates, foreign exchange rates,
credit spreads and price deterioration or changes in value due to changes in
market perception or actual credit quality of either the issuer or its country
of origin. Accordingly, depending on the instruments or activities impacted,
market risks can have wide ranging, complex adverse effects on our results from
operations and our overall financial condition.
The models that we use to assess and control our risk exposures reflect
assumptions about the degrees of correlation or lack thereof among prices of
various asset classes or other market indicators. In times of market stress or
other unforeseen circumstances, such as the market conditions experienced
during 2008, previously uncorrelated indicators may become correlated, or
previously correlated indicators may move in different directions. These types
of market movements have at times limited the effectiveness of our hedging
strategies and have caused us to incur significant losses, and they may do so
in the future. These changes in correlation can be exacerbated where other
market participants are using risk or trading models with assumptions or
algorithms that are similar to ours. In these and other cases, it may be
difficult to reduce our risk positions due to the activity of other market
participants or widespread market dislocations, including circumstances where
asset values are declining significantly or no market exists for certain assets.
To the extent that we make investments in securities that do not have an
established liquid trading market or are otherwise subject to restrictions on
sale or hedging, we may not be able to reduce our positions and therefore reduce
our risk associated with such positions.
For a further discussion of market risk and our market risk management policies
and procedures, see Item 7A - Quantitative and Qualitative Disclosures About
Market Risk.
Risks Related to our Commodities Business
- -----------------------------------------
We are exposed to environmental, reputational, regulatory, market and credit
risk as a result of our commodities related activities. Through our commodities
business, we enter into exchange-traded contracts, financially settled
over-the-counter derivatives, contracts for physical delivery and contracts
providing for the transportation, transmission and/or storage rights on or in
vessels, barges, pipelines, transmission lines or storage facilities. Contracts
relating to physical ownership, delivery and/or related activities can expose us
to numerous risks, including performance, environmental and reputational risks.
For example, we may incur civil or criminal liability under certain
environmental laws and our business and reputation may be adversely affected.
In addition, regulatory authorities have recently intensified scrutiny of
certain energy markets, which has resulted in increased regulatory and legal
enforcement, litigation and remedial proceedings involving companies engaged in
the activities in which we are engaged.
Declining Asset Values
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We have large proprietary trading and investment positions in a number of our
businesses. These positions are accounted for at fair value, and the declines
in the values of assets had a direct and large negative impact on our earnings
in 2008. We may incur additional losses as a result of increased market
volatility or decreased market liquidity, which may adversely impact the
valuation of our trading and investment positions. If an asset is
marked-to-market, declines in asset values directly and immediately impact our
earnings, unless we have effectively "hedged" our exposures to such declines.
These exposures may continue to be impacted by declining values of the
underlying assets. In addition, the prices at which observable market
transactions occur and the continued availability of these transactions, and the
financial strength of counterparties, such as financial guarantors, with whom we
have economically hedged some of our exposure to these assets, will affect the
value of these assets. Sudden declines and significant volatility in the prices
of assets may substantially curtail or eliminate the trading activity for these
assets, which may make it very difficult to sell, hedge or value such assets.
The inability to sell or effectively hedge assets reduces our ability to limit
losses in such positions and the difficulty in valuing assets may increase our
risk-weighted assets which requires us to maintain additional capital and
increases our funding costs.
Asset values also directly impact revenues from our wealth management business.
We receive certain account fees based on the value of our clients' portfolios
or investment in funds managed by us and, in some cases, we also receive
incentive fees based on increases in the value of such investments. Declines
in asset values have reduced the value of our clients' portfolios or fund
assets, which in turn has reduced the fees we earn for managing such assets.
Merger Risks
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There are significant risks and uncertainties associated with mergers. The
success of Bank of America's acquisition of us will depend, in part, on the
ability of the combined company to realize the anticipated benefits and cost
savings from combining our businesses with Bank of America's businesses.
If the combined company is unable to achieve these objectives, the anticipated
benefits and cost savings of the merger may not be realized fully or at all or
may take longer to realize than expected. For example, the combined company
may fail to realize the growth opportunities and cost savings anticipated
to be derived from the merger. Our businesses currently are experiencing
unprecedented challenges as a result of the current economic environment
and ongoing financial crisis. It is possible that the integration process,
including changes or perceived changes in our compensation practices, could
result in the loss of key employees, the disruption of our ongoing businesses
or inconsistencies in standards, controls, procedures and policies that
adversely affect our ability to maintain relationships with clients and
employees or to achieve the anticipated benefits of the merger. Integration
efforts also may divert management attention and resources. These integration
matters could have an adverse effect on us for an undetermined period after
consummation of the merger.
Regulatory Considerations and Restrictions on Dividends
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As a subsidiary of Bank of America, we are, and certain of our bank and
non-bank subsidiaries are heavily regulated by bank regulatory agencies at the
federal and state levels. This regulatory oversight is established to protect
depositors, federal deposit insurance funds and the banking system as a whole,
not security holders. Bank of America, we and our broker-dealer and other
non-bank subsidiaries are also heavily regulated by securities regulators,
domestically and internationally. This regulation is designed to protect
investors in securities we sell or underwrite and our clients' assets.
Congress and state legislatures and foreign, federal and state regulatory
agencies continually review laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
interpretation or implementation of statutes, regulations or policies,
could affect us in substantial and unpredictable ways including limiting the
types of financial services and products we may offer and increasing the
ability of non-banks to offer competing financial services and products.
As a result of the ongoing financial crisis and challenging market
conditions, we expect to face increased regulation and regulatory and
political scrutiny of the financial services industry, including as a result of
Bank of America's or our participation in the TARP Capital Purchase Program,
the ARRA and the U.S. Treasury's Financial Stability Plan. Compliance with such
regulation may significantly increase our costs, impede the efficiency of
our internal business processes, and limit our ability to pursue business
opportunities in an efficient manner. The increased costs associated
with anticipated regulatory and political scrutiny could adversely impact our
results of operations.
Litigation Risks
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Both Bank of America and Merrill Lynch face significant legal risks in our
respective businesses, and the volume of claims and amount of damages
and penalties claimed in litigation and regulatory proceedings against
financial institutions remain high and are increasing. Substantial legal
liability or significant regulatory action against Bank of America or us
could have material adverse financial effects or cause significant
reputational harm to us, which in turn could seriously harm our business
prospects. For a further discussion of litigation risks, see "Litigation and
Regulatory Matters" in Note 11 to the Consolidated Financial Statements.
We may explore potential settlements before a case is taken through trial
because of uncertainty, risks, and costs inherent in the litigation process.
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 5, Accounting for Contingencies ("SFAS No. 5"), we will accrue a
liability when it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. In many lawsuits,
arbitrations and investigations, including almost all of the class action
lawsuits disclosed in "Litigation and Regulatory Matters" in Note 11 to
the Consolidated Financial Statements, it is not possible to determine
whether a liability has been incurred or to estimate the ultimate or minimum
amount of that liability until the matter is close to resolution, in which
case no accrual is made until that time. In view of the inherent difficulty of
predicting the outcome of such matters, particularly in matters in which
claimants seek substantial or indeterminate damages, we cannot predict what the
eventual loss or range of loss related to such matters will be. Potential
losses may be material to our operating results for any particular period
and may impact our credit ratings. For a further discussion of litigation
risks, see "Litigation and Regulatory Matters" in Note 11 to the
Consolidated Financial Statements.
Governmental Fiscal and Monetary Policy
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Our businesses and earnings are affected by domestic and international
fiscal and monetary policy. For example, the Federal Reserve Board regulates
the supply of money and credit in the United States and its policies determine
in large part our cost of funds for lending, investing and capital raising
activities and the return we earn on those loans and investments, both of
which affect our net interest profit. The actions of the Federal Reserve
Board also can materially affect the value of financial instruments we hold,
such as debt securities. Our businesses and earnings also are affected by
the fiscal or other policies that are adopted by various regulatory
authorities of the United States, non-U.S. governments and international
agencies. Changes in domestic and international fiscal and monetary policy
are beyond our control and hard to predict.
Operational Risks
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The potential for operational risk exposure exists throughout our
organization. Integral to our performance is the continued efficacy of
our technical systems, operational infrastructure, relationships with
third parties and the vast array of associates and key executives in our
day-to-day and ongoing operations. Failure by any or all of these resources
subjects us to risks that may vary in size, scale and scope. This includes
but is not limited to operational or technical failures, unlawful tampering
with our technical systems, terrorist activities, ineffectiveness or
exposure due to interruption in third party support, as well as the loss
of key individuals or failure on the part of the key individuals to
perform properly.
Products and Services
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Our business model is based on a diversified mix of businesses that provides
a broad range of financial products and services, delivered through multiple
distribution channels. Our success depends, in part, on our ability to adapt
our products and services to evolving industry standards. There is
increasing pressure by competition to provide products and services at lower
prices. This can reduce our revenues from our fee-based products and
services. In addition, the widespread adoption of new technologies,
including internet services, could require us to incur substantial
expenditures to modify or adapt our existing products and services. We might
not be successful in developing and introducing new products and services,
responding or adapting to changes in consumer spending and saving habits,
achieving market acceptance of our products and services, or developing and
maintaining loyal customers.
Reputational Risks
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Our ability to attract and retain clients and employees could be adversely
affected to the extent our reputation is damaged. Our actual or perceived
failure to address various issues could give rise to reputational risk
that could harm us or our business prospects. These issues include,
but are not limited to, appropriately addressing potential conflicts of
interest; legal and regulatory requirements; ethical issues; money-laundering;
privacy; properly maintaining customer and associate personal
information; record keeping; sales and trading practices; and the proper
identification of the legal, reputational, credit, liquidity and market risks
inherent in our products.
Risk Management Processes and Strategies
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We seek to monitor and control our risk exposure through a variety of
separate but complementary financial, credit, operational, compliance and
legal reporting systems. While we employ a broad and diversified set of risk
monitoring and risk mitigation techniques, those techniques and the judgments
that accompany their application cannot anticipate every economic and
financial outcome or the specifics and timing of such outcomes. Accordingly,
our ability to successfully identify and manage risks facing us is an
important factor that can significantly impact our results. For a further
discussion of our risk management policies and procedures, see Item
7A - Quantitative and Qualitative Disclosures About Market Risk.
Geopolitical Risks
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Geopolitical conditions can affect our earnings. Acts or threats of
terrorism, actions taken by the United States or other governments in
response to acts or threats of terrorism and/or military conflicts, could
affect business and economic conditions in the United States and abroad.
Additional Risks and Uncertainties
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We are a diversified financial services company. Although we believe our
diversity helps lessen the effect when downturns affect any one segment of
our industry, it also means our earnings could be subject to different
risks and uncertainties than the ones discussed herein. If any of the risks
that we face actually occur, irrespective of whether those risks are
described in this section or elsewhere in this report, our business,
financial condition and operating results could be materially adversely
affected.