Wells Fargo 2007 Annual Report Download - page 103

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Note 15: Guarantees and Legal Actions
The significant guarantees we provide to third parties
include standby letters of credit, various indemnification
agreements, guarantees accounted for as derivatives,
additional consideration 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 obligated to make payment if a customer defaults. Standby
letters of credit were $12.5 billion at December 31, 2007, and
$12.0 billion at December 31, 2006, including financial guarantees
of $6.5 billion and $7.2 billion, respectively, that we had issued
or purchased participations in. Standby letters of credit are net
of participations sold to other institutions of $1.4 billion at
December 31, 2007, and $2.8 billion at December 31, 2006. We
consider the credit risk in standby letters of credit in determining
the allowance for credit losses. We also had commitments for
commercial and similar letters of credit of $955 million at
December 31, 2007, and $801 million at December 31, 2006.
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. Periodic settlements
occur on floors and caps based on market conditions. The
fair value of the written options liability in our balance sheet
was $700 million at December 31, 2007, and $556 million
at December 31, 2006. The aggregate fair value of the written
floors and caps liability was $280 million and $86 million
for the same periods, 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 $30.7 billion
at December 31, 2007, and $47.3 billion at December 31,
2006, and the aggregate notional value related to written
floors and caps was $26.5 billion and $11.9 billion for the
same periods, 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 counter-
party in the event of default of a reference obligation. The
fair value of the contracts sold was a liability of $20 million
at December 31, 2007, and $2 million at December 31, 2006.
The maximum amount we would be required to pay under
the swaps in which we sold protection, assuming all refer-
ence obligations default at a total loss, without recoveries, was
$873 million and $599 million, based on notional value, at
December 31, 2007 and 2006, respectively. We purchased
credit default swaps of comparable notional amounts to
mitigate the exposure of the written credit default swaps
at December 31, 2007 and 2006. 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,
insurance agency and other 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, 2007 and 2006, the
amount of additional 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 up to 22 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. The extent of our obligations under
these guarantees depends entirely on future events and was
contractually limited to an aggregate liability of approximately
$50 million at December 31, 2007, and $125 million at
December 31, 2006.
In the normal course of business, we are subject to pending
and threatened legal actions, some for which the relief or
damages sought are substantial. After reviewing pending and
threatened actions with counsel, and any specific reserves
established for such matters, management believes that the
outcome of such actions will not have a material adverse
effect on the results of operations or stockholders’ equity. We
are not able to predict whether the outcome of such actions
may or may not have a material adverse effect on results of
operations in a particular future period as the timing and
amount of any resolution of such actions and its relationship
to the future results of operations are not known.
Wells Fargo is a member of the Visa USA network. On
October 3, 2007, the Visa organization of affiliated entities
completed a series of global restructuring transactions to
combine its affiliated operating companies, including Visa
USA, under a single holding company, Visa Inc. Visa Inc.
intends to issue and sell a majority of its shares to the public
in an initial public offering (IPO). We have an approximate
2.8% ownership interest in Visa Inc., which is included in
our balance sheet at a nominal amount.
We obtained concurrence from the staff of the SEC
concerning our accounting for the Visa restructuring
transactions, including (1) judgment sharing agreements
previously executed among the Company, Visa Inc. and its