Wells Fargo 2011 Annual Report Download - page 109

sections and Note 14 (Guarantees) and Note 15 (Legal Actions) to
Financial Statements in this Report.
Financial difficulties or credit downgrades of mortgage
and bond insurers may negatively affect our servicing
and investment portfolios. Our servicing portfolio includes
certain mortgage loans that carry some level of insurance from
one or more mortgage insurance companies. To the extent that
any of these companies experience financial difficulties or credit
downgrades, we may be required, as servicer of the insured loan
on behalf of the investor, to obtain replacement coverage with
another provider, possibly at a higher cost than the coverage we
would replace. We may be responsible for some or all of the
incremental cost of the new coverage for certain loans depending
on the terms of our servicing agreement with the investor and
other circumstances, although we do not have an additional risk
of repurchase loss associated with claim amounts for loans sold
to third-party investors. Similarly, some of the mortgage loans
we hold for investment or for sale carry mortgage insurance. If a
mortgage insurer is unable to meet its credit obligations with
respect to an insured loan, we might incur higher credit losses if
replacement coverage is not obtained. For example, in October
2011, PMI Mortgage Insurance Co. (PMI), one of our providers of
mortgage insurance, was seized by its regulator. We previously
utilized PMI to provide mortgage insurance on certain loans
originated and held in our portfolio and on loans originated and
sold to third-party investors. We also hold a small amount of
residential MBS, which are backed by mortgages with a limited
amount of insurance provided by PMI. PMI has announced that
it will pay 50% of insurance claim amounts in cash with the rest
deferred. Although we do not expect PMI’s situation to have a
material adverse effect on our financial results because of the
limited amount of loans and securities held in our portfolios with
PMI insurance support, we cannot be certain that any such
future events involving one of our other mortgage insurance
company providers will not materially adversely affect our
mortgage business and/or financial results. We also have
investments in municipal bonds that are guaranteed against loss
by bond insurers. The value of these bonds and the payment of
principal and interest on them may be negatively affected by
financial difficulties or credit downgrades experienced by the
bond insurers.
For more information, refer to the “Earnings Performance –
Balance Sheet Analysis – Securities Available for Sale” and “Risk
Management – Credit Risk Management– Liability for Mortgage
Loan Repurchase Losses” sections in this Report.
OPERATIONAL AND LEGAL RISK
A failure in or breach of our operational or security
systems or infrastructure, or those of our third party
vendors and other service providers, including as a
result of cyber attacks, could disrupt our businesses,
result in the disclosure or misuse of confidential or
proprietary information, damage our reputation,
increase our costs and cause losses. As a large financial
institution that serves over 70 million customers through over
9,000 stores, 12,000 ATMs, the Internet and other distribution
channels across the U.S. and internationally, we depend on our
ability to process, record and monitor a large number of
customer transactions on a continuous basis. As our customer
base and locations have expanded throughout the U.S. and
internationally, and as customer, public and regulatory
expectations regarding operational and information security
have increased, our operational systems and infrastructure must
continue to be safeguarded and monitored for potential failures,
disruptions and breakdowns. Our business, financial,
accounting, data processing systems or other operating systems
and facilities may stop operating properly or become disabled or
damaged as a result of a number of factors including events that
are wholly or partially beyond our control. For example, there
could be sudden increases in customer transaction volume;
electrical or telecommunications outages; natural disasters such
as earthquakes, tornados, and hurricanes; disease pandemics;
events arising from local or larger scale political or social
matters, including terrorist acts; and, as described below, cyber
attacks. Although we have business continuity plans and other
safeguards in place, our business operations may be adversely
affected by significant and widespread disruption to our physical
infrastructure or operating systems that support our businesses
and customers.
Information security risks for large financial institutions such
as Wells Fargo have generally increased in recent years in part
because of the proliferation of new technologies, the use of the
Internet and telecommunications technologies to conduct
financial transactions, and the increased sophistication and
activities of organized crime, hackers, terrorists, activists, and
other external parties. Those parties also may attempt to
fraudulently induce employees, customers, or other users of our
systems to disclose confidential information in order to gain
access to our data or that of our customers. As noted above, our
operations rely on the secure processing, transmission and
storage of confidential information in our computer systems and
networks. Our banking, brokerage, investment advisory, and
capital markets businesses rely on our digital technologies,
computer and email systems, software, and networks to conduct
their operations. In addition, to access our products and services,
our customers may use personal smartphones, tablet PC’s, and
other mobile devices that are beyond our control systems.
Although we believe we have robust information security
procedures and controls, our technologies, systems, networks,
and our customers’ devices may become the target of cyber
attacks or information security breaches that could result in the
unauthorized release, gathering, monitoring, misuse, loss or
destruction of Wells Fargo’s or our customers’ confidential,
proprietary and other information, or otherwise disrupt Wells
Fargo’s or its customers’ or other third parties’ business
operations.
Third parties with which we do business or that facilitate our
business activities, including exchanges, clearing houses,
financial intermediaries or vendors that provide services or
security solutions for our operations, could also be sources of
operational and information security risk to us, including from
breakdowns or failures of their own systems or capacity
constraints.
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