Wells Fargo 2008 Annual Report Download - page 83

ings. Many of our competitors also focus on cross-selling, espe-
cially in retail banking and mortgage lending. This can limit our
ability to sell more products to our customers or put pressure on
us to sell our products at lower prices, reducing our net interest
income and revenue from our fee-based products. It could also
affect our ability to keep existing customers. New technologies
could require us to spend more to modify or adapt our products
to attract and retain customers. Increasing our cross-sell ratio—
or the average number of products sold to existing customers—
may become more challenging, especially given that our cross-
sell ratio is already high, and we might not attain our goal of
selling an average of eight products to each customer.
The economic recession could reduce demand for our products
and services and lead to lower revenue and lower earnings. We
earn revenue from the interest and fees we charge on the loans
and other products and services we sell. As the economy worsens
and consumer and business spending decreases and unemploy-
ment rises, the demand for those products and services can fall,
reducing our interest and fee income and our earnings. These
same conditions can also hurt the ability of our borrowers to
repay their loans, causing us to incur higher credit losses.
Changes in stock market prices could reduce fee income from
our brokerage and asset management businesses. We earn fee
income from managing assets for others and providing brokerage
services. Because investment management fees are often based
on the value of assets under management, a fall in the market
prices of those assets could reduce our fee income. Changes in
stock market prices could affect the trading activity of investors,
reducing commissions and other fees we earn from our brokerage
business. As a result of the Wachovia merger, a greater percentage
of our revenue will depend on our brokerage services business.
For more information, refer to “Risk Management –
Asset/Liability and Market Risk Management – Market Risk –
Equity Markets” in the Financial Review section of this Report.
We may elect to provide capital support to our mutual funds
relating to investments in structured credit products. Our
money market mutual funds are allowed to hold investments
in structured investment vehicles (SIVs) in accordance with
approved investment parameters for the respective funds and,
therefore, we may have indirect exposure to collateralized debt
obligations (CDOs). Although we generally are not responsible
for investment losses incurred by our mutual funds, we may from
time to time elect to provide support to a fund even though we
are not contractually obligated to do so. For example, in February
2008, to maintain an investment rating of AAA for certain non-
government money market mutual funds, we elected to enter into
a capital support agreement for up to $130 million related to one
SIV held by those funds.
For more information, refer to Note 8 (Securitizations and
Variable Interest Entities) to Financial Statements in this Report.
Our bank customers could take their money out of the bank and
put it in alternative investments, causing us to lose a lower cost
source of funding. Checking and savings account balances and
other forms of customer deposits can decrease when customers
perceive alternative investments, such as the stock market, as
providing a better risk/return tradeoff. When customers move
money out of bank deposits and into other investments, we can
lose a relatively low cost source of funds, increasing our funding
costs and reducing our net interest income.
Our venture capital business can also be volatile from quarter to
quarter. Certain of our venture capital businesses are carried
under the cost or equity method, and others (e.g., principal
investments) are carried at fair value with unrealized gains and
losses reflected in earnings. Our venture capital investments
tend to be in technology and other volatile industries, so the
value of our public and private equity portfolios can fluctuate
widely. Earnings from our venture capital investments can be
volatile and hard to predict and can have a significant effect on
our earnings from period to period. When, and if, we recognize
gains can depend on a number of factors, including general eco-
nomic conditions, the prospects of the companies in which we
invest, when these companies go public, the size of our position
relative to the public float, and whether we are subject to any
resale restrictions.
Our venture capital investments could result in significant
losses, either other-than-temporary impairment losses for those
investments carried under the cost or equity method or mark-to-
market losses for principal investments. Our assessment for
other-than-temporary impairment is based on a number of fac-
tors, including the then current market value of each investment
compared to its carrying value. If we determine there is other-
than-temporary impairment for an investment, we will write-
down the carrying value of the investment, resulting in a charge
to earnings. The amount of this charge could be significant.
Further, our principal investing portfolio could incur significant
mark-to-market losses especially if these investments have been
written up because of higher market prices.
For more information, refer to “Risk Management –
Asset/Liability and Market Risk Management – Market Risk –
Equity Markets” in the Financial Review section of this Report.
We rely on dividends from our subsidiaries for revenue, and
federal and state law can limit those dividends. Wells Fargo &
Company, the parent holding company, is a separate and distinct
legal entity from its subsidiaries. It receives a significant portion
of its revenue from dividends from its subsidiaries. We use these
dividends to pay dividends on our common and preferred stock
and interest and principal on our debt. Federal and state laws limit
the amount of dividends that our bank and some of our nonbank
subsidiaries may pay to us. Also, our right to participate in a
distribution of assets upon a subsidiary’s liquidation or reorgani-
zation is subject to the prior claims of the subsidiary’s creditors.
For more information, refer to “Regulation and Supervision –
Dividend Restrictions” and “– Holding Company Structure” in our
2008 Form 10-K and to Notes 3 (Cash, Loan and Dividend Restrictions)
and 26 (Regulatory and Agency Capital Requirements) to
Financial Statements in this Report.
Changes in accounting policies or accounting standards, and
changes in how accounting standards are interpreted or applied,
could materially affect how we report our financial results and
condition. Our accounting policies are fundamental to determin-
ing and understanding our financial results and condition. Some
of these policies require use of estimates and assumptions that
may affect the value of our assets or liabilities and financial
results. Six of our accounting policies are critical because they
require management to make difficult, subjective and complex
judgments about matters that are inherently uncertain and
because it is likely that materially different amounts would be
reported under different conditions or using different assump-
tions. For a description of these policies, refer to “Critical
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