Wells Fargo 2005 Annual Report Download - page 107

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Note 24: Guarantees
We provide significant guarantees to third parties including
standby letters of credit, various indemnification agreements,
guarantees accounted for as derivatives, contingent consider-
ation related to business combinations and contingent
performance guarantees.
We issue standby letters of credit, which include performance
and financial guarantees, for customers in connection with
contracts between the customers and third parties. Standby
letters of credit assure that the third parties will receive
specified funds if customers fail to meet their contractual
obligations. We are obliged to make payment if a customer
defaults. Standby letters of credit were $10.9 billion at
December 31, 2005, and $9.4 billion at December 31, 2004,
including financial guarantees of $6.4 billion and $5.3 billion,
respectively, that we had issued or purchased participations
in. Standby letters of credit are net of participations sold to
other institutions of $2.1 billion at December 31, 2005,
and $1.7 billion at December 31, 2004. We consider the
credit risk in standby letters of credit in determining the
allowance for credit losses. Deferred fees for these standby
letters of credit were not significant to our financial statements.
We also had commitments for commercial and similar
letters of credit of $761 million at December 31, 2005,
and $731 million at December 31, 2004. At December 31,
2004, we also provided a back-up liquidity facility to a
commercial paper conduit that we considered to be a financial
guarantee. This credit facility, which was terminated in
2005, would have required us to advance, under certain
conditions, up to $860 million at December 31, 2004. This
back-up liquidity facility was included within our commercial
loan commitments at December 31, 2004, and was substantially
collateralized in the event it was drawn upon.
We enter into indemnification agreements in the ordinary
course of business under which we agree to indemnify third
parties against any damages, losses and expenses incurred in
connection with legal and other proceedings arising from
relationships or transactions with us. These relationships or
transactions include those arising from service as a director
or officer of the Company, underwriting agreements relating to
our securities, securities lending, acquisition agreements, and
various other business transactions or arrangements. Because
the extent of our obligations under these agreements depends
entirely upon the occurrence of future events, our potential
future liability under these agreements is not determinable.
We write options, floors and caps. Options are exercisable
based on favorable market conditions. Periodic settlements
occur on floors and caps based on market conditions. The
fair value of the written options liability in our balance sheet
was $563 million at December 31, 2005, and $374 million
at December 31, 2004. The aggregate written floors and caps
liability was $169 million and $227 million, respectively. Our
ultimate obligation under written options, floors and caps is
based on future market conditions and is only quantifiable
at settlement. The notional value related to written options
was $45.5 billion at December 31, 2005, and $29.7 billion
at December 31, 2004, and the aggregate notional value
related to written floors and caps was $24.3 billion and
$34.7 billion, respectively. We offset substantially all
options written to customers with purchased options.
We also enter into credit default swaps under which
we buy loss protection from or sell loss protection to a
counterparty in the event of default of a reference obligation.
The carrying amount of the contracts sold was a liability
of $6 million at December 31, 2005, and $2 million at
December 31, 2004. The maximum amount we would be
required to pay under the swaps in which we sold protection,
assuming all reference obligations default at a total loss,
without recoveries, was $2.7 billion and $2.6 billion
based on notional value at December 31, 2005 and 2004,
respectively. We purchased credit default swaps of comparable
notional amounts to mitigate the exposure of the written
credit default swaps at December 31, 2005 and 2004. These
purchased credit default swaps had terms (i.e., used the same
reference obligation and maturity) that would offset our
exposure from the written default swap contracts in which
we are providing protection to a counterparty.
In connection with certain brokerage, asset management
and insurance agency acquisitions we have made, the terms
of the acquisition agreements provide for deferred payments
or additional consideration based on certain performance
targets. At December 31, 2005 and 2004, the amount of
contingent consideration we expected to pay was not
significant to our financial statements.
We have entered into various contingent performance
guarantees through credit risk participation arrangements
with remaining terms ranging from one to 24 years. We will
be required to make payments under these guarantees if a
customer defaults on its obligation to perform under certain
credit agreements with third parties. Because the extent of
our obligations under these guarantees depends entirely
on future events, our potential future liability under these
agreements is not fully determinable. However, our exposure
under most of the agreements can be quantified and for
those agreements our exposure was contractually limited
to an aggregate liability of approximately $110 million at
December 31, 2005, and $370 million at December 31, 2004.