Wells Fargo 2009 Annual Report Download - page 144

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collateral declines to zero, without any consideration of
recovery or offset from any economic hedges. Accordingly,
this required disclosure is not an indication of expected loss.
We believe the carrying value, which is either fair value or
cost adjusted for incurred credit losses, is more representa -
tive of our exposure to loss than maximum exposure to loss.
We issue standby letters of credit, which include perfor-
mance and financial guarantees, for customers in connection
with contracts between our customers and third parties.
Standby letters of credit are agreements where we are obligat-
ed to make payment to a third party on behalf of a customer
in the event the customer fails to meet their contractual oblig-
ations. We consider the credit risk in standby letters of credit
and commercial and similar letters of credit in determining
the allowance for credit losses.
As a securities lending agent, we loan client securities,
on a fully collateralized basis, to third party borrowers.
We indemnify our clients against borrower default of a return
of those securities and, in certain cases, against collateral
losses. We support these guarantees with collateral, generally
in the form of cash or highly liquid securities that is marked
to market daily. There was $20.7 billion at December 31,
2009, and $31.0 billion at December 31, 2008, in collateral
supporting loaned securities with values of $20.0 billion
and $30.1 billion, respectively.
We enter into other types of 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, 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 provide liquidity facilities on all commercial paper
issued by the conduit we administer. We also provide liquidity
to certain off-balance sheet entities that hold securitized fixed-
rate municipal bonds and consumer or commercial assets
that are partially funded with the issuance of money market
and other short-term notes. See Note 8 in this Report for
additional information on these arrangements.
Written put options are contracts that give the counterparty
the right to sell to us an underlying instrument held by the
counterparty at a specified price, and include options, floors,
caps and credit default swaps. These written put option
contracts generally permit net settlement. While these
derivative transactions expose us to risk in the event the
option is exercised, we manage this risk by entering into off-
setting trades or by taking short positions in the underlying
instrument. We offset substantially all put options written
to customers with purchased options. Additionally, for certain
of these contracts, we require the counterparty to pledge the
underlying instrument as collateral for the transaction. Our
ultimate obligation under written put options is based on
future market conditions and is only quantifiable at settlement.
See Note 8 in this Report for additional information regarding
transactions with VIEs and Note 15 in this Report for additional
information regarding written derivative contracts.
In certain loan sales or securitizations, we provide
recourse to the buyer whereby we are required to repurchase
loans at par value plus accrued interest on the occurrence of
certain credit-related events within a certain period of time.
The maximum exposure to loss represents the outstanding
principal balance of the loans sold or securitized that are
subject to recourse provisions, but the likelihood of the repur-
chase of the entire balance is remote and amounts paid can
be recovered in whole or in part from the sale of collateral.
In 2009, we did not repurchase a significant amount of loans
associated with these agreements.
We have provided residual value guarantees as part of cer-
tain leasing transactions of corporate assets. At December 31,
2009, the only remaining residual value guarantee related
to a leasing transaction on certain corporate buildings. At
December 31, 2008, the residual value guarantees also
included leasing transactions related to railcars, which were
unwound in first quarter 2009. The lessors in these leases
are generally large financial institutions or their leasing sub-
sidiaries. These guarantees protect the lessor from loss on
sale of the related asset at the end of the lease term. To the
extent that a sale of the leased assets results in proceeds less
than a stated percent (generally 80% to 89%) of the asset’s
cost less depreciation, we would be required to reimburse
the lessor under our guarantee.
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.
We have entered into various contingent performance
guarantees through credit risk participation arrangements.
Under these agreements, if a customer defaults on its obliga-
tion to perform under certain credit agreements with third
parties, we will be required to make payments to the
third parties.
Legal Actions
Wells Fargo and certain of our subsidiaries are involved in
a number of judicial, regulatory and arbitration proceedings
concerning matters arising from the conduct of our business
activities. These proceedings include actions brought against
Wells Fargo and/or our subsidiaries with respect to corporate
related matters and transactions in which Wells Fargo and/or
our subsidiaries were involved. In addition, Wells Fargo and
our subsidiaries may be requested to provide information
or otherwise cooperate with governmental authorities in the
conduct of investigations of other persons or industry groups.
Although there can be no assurance as to the ultimate
outcome, Wells Fargo and/or our subsidiaries have generally
denied, or believe we have a meritorious defense and will
deny, liability in all significant litigation pending against
us, including the matters described below, and we intend to
defend vigorously each case, other than matters we describe
Note 14: Guarantees and Legal Actions (continued)