Wells Fargo 2008 Annual Report Download - page 117

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COLLATERALIZED DEBT OBLIGATIONS AND COLLATERALIZED
LOAN OBLIGATIONS A CDO or CLO is a securitization where
an SPE purchases a pool of assets consisting of asset-backed
securities or loans and issues multiple tranches of equity
or notes to investors. In some transactions a portion of the
assets are obtained synthetically through the use of derivatives
such as credit default swaps or total return swaps. Generally,
CDOs and CLOs are structured on behalf of a third party
asset manager that typically selects and manages the assets
for the term of the CDO or CLO. Typically, the asset manager
has some discretion to manage the sale of assets of, or
derivatives used by the CDOs and CLOs.
Prior to the securitization, we may provide all or substantially
all of the warehouse financing to the asset manager. The
asset manager uses this financing to purchase the assets into
a bankruptcy remote SPE during the warehouse period. At
the completion of the warehouse period, the assets are sold to
the CDO or CLO and the warehouse financing is repaid with
the proceeds received from the securitization’s investors.
The warehousing period is generally less than 12 months in
duration. In the event the securitization does not take place,
the assets in the warehouse are liquidated. We consolidate
the warehouse SPEs when we are the primary beneficiary.
We are the primary beneficiary when we provide substantially
all of the financing and therefore absorb the majority of the
variability. Sometimes we have loss sharing arrangements
whereby a third party asset manager agrees to absorb the
credit and market risk during the warehousing period or upon
liquidation of the collateral in the event a securitization does
not take place. In those circumstances we do not consolidate
the warehouse SPE because the third party asset manager
absorbs the majority of the variability through the loss
sharing arrangement.
In addition to our role as arranger and warehouse financing
provider, we may have other forms of involvement with these
transactions. Such involvements may include underwriter,
liquidity provider, derivative counterparty, secondary market
maker or investor. For certain transactions, we may also
Transactions with VIEs
Our transactions with VIEs include securitization, investment
and financing activities involving collateralized debt
obligations (CDOs) backed by asset-backed and commercial
real estate securities, collateralized loan obligations (CLOs)
backed by corporate loans or bonds, and other types of
structured financing. We have various forms of involvement
with SPEs, including holding senior or subordinated interests,
entering into liquidity arrangements, credit default swaps
and other derivative contracts.
A summary of our involvements with off-balance sheet
(unconsolidated) VIEs is as follows:
(in millions) December 31, 2008
Total Debt and Derivatives Other Total
VIE equity commit-
assets(1) interests ments and
guarantees
Carrying value – asset (liability)
CDOs $ 48,802 $14,080 $ 1,053 $ — $15,133
Wachovia administered ABCP conduit 10,767 ————
Asset-based lending structures 11,614 9,232 (136) — 9,096
Tax credit structures 22,882 4,366 — (516) 3,850
CLOs 23,339 3,217 109 — 3,326
Investment funds 105,808 3,543 — — 3,543
Credit-linked note structures 12,993 50 1,472 — 1,522
Money market funds 31,843 50 10 — 60
Other (2) 1,832 3,983 (36) (141) 3,806
Total $269,880 $38,521 $ 2,472 $ (657) $40,336
Maximum exposure to loss(3)
CDOs $14,080 $ 4,849 $1,514 $20,443
Wachovia administered ABCP conduit — 15,824 — 15,824
Asset-based lending structures 9,346 136 — 9,482
Tax credit structures 4,366 — 560 4,926
CLOs 3,217 109 555 3,881
Investment funds 3,550 — 140 3,690
Credit-linked note structures 50 2,253 — 2,303
Money market funds 50 51 — 101
Other (2) 3,991 130 578 4,699
Total $38,650 $23,352 $3,347 $65,349
(1) Represents the remaining principal balance of assets held by unconsolidated VIEs using the most current information available. For VIEs that obtain exposure to assets
synthetically through derivative instruments, the remaining notional amount of the derivative is included in the asset balance.
(2) Contains investments in auction rate securities issued by VIEs that we do not sponsor and, accordingly, are unable to obtain the total assets of the entity.
(3) Represents the carrying amount of the continuing involvement plus remaining undrawn liquidity and lending commitments, notional amount of net written derivative
contracts, and notional amount of other commitments and guarantees.