Wells Fargo 2011 Annual Report Download - page 182

Note 14: Guarantees, Pledged Assets, and Collateral (continued)
LIQUIDITY AGREEMENTS
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 for
additional information on these arrangements.
WRITTEN PUT OPTIONS 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
offsetting 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 for additional information regarding transactions with
VIEs and Note 16 for additional information regarding written
derivative contracts.
LOANS AND MHFS SOLD WITH RECOURSE In certain loan sales
or securitizations, we provide recourse to the buyer whereby we
are required to indemnify the buyer for any loss on the loan up
to par value plus accrued interest. We provide recourse,
predominantly to the GSEs, on loans sold under various
programs and arrangements. Primarily all of these programs and
arrangements require that we share in the loans’ credit exposure
for their remaining life by providing recourse to the GSE, up to
33.33% of actual losses incurred on a pro-rata basis, in the event
of borrower default. Under the remaining recourse programs
and arrangements, if certain events occur within a specified
period of time from transfer date, we have to provide limited
recourse to the buyer to indemnify them for losses incurred for
the remaining life of the loans. The maximum exposure to loss
reported in the accompanying table represents the outstanding
principal balance of the loans sold or securitized that are subject
to recourse provisions or the maximum losses per the
contractual agreements. However, we believe the likelihood of
loss of the entire balance due to these recourse agreements is
remote and amounts paid can be recovered in whole or in part
from the sale of collateral. In 2011, we repurchased $38 million
of loans associated with these agreements. We also provide
representation and warranty guarantees on loans sold under the
various recourse programs and arrangements. Our loss exposure
relative to these guarantees is separately considered and
provided for, as necessary, in determination of our liability for
loan repurchases due to breaches of representation and
warranties. See Note 9 for additional information on the liability
for mortgage loan repurchase losses.
RESIDUAL VALUE GUARANTEES We have provided residual
value guarantees as part of certain leasing transactions of
corporate assets. At December 31, 2011, the only remaining
residual value guarantee is related to a leasing transaction on
certain corporate buildings. The lessors in these leases are
generally large financial institutions or their leasing subsidiaries.
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, we would be
required to reimburse the lessor under our guarantee.
CONTINGENT CONSIDERATION 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 obligation
to perform under certain credit agreements with third parties,
we will be required to make payments to the third parties.
Pledged Assets and Collateral
As part of our liquidity management strategy, we pledge assets to
secure trust and public deposits, borrowings from the FHLB and
FRB and for other purposes as required or permitted by law. The
following table provides pledged loans and securities available
for sale where the secured party does not have the right to sell or
repledge the collateral. At December 31, 2011 and 2010, we did
not pledge any loans or securities available for sale where the
secured party has the right to sell or repledge the collateral. The
table excludes pledged assets related to VIEs, which can only be
used to settle the liabilities of those entities. See Note 8 for
additional information on consolidated VIE assets.
Dec. 31,
Dec. 31,
(in millions)
2011
2010
Securities available for sale
$
80,540
94,212
Loans
317,742
312,602
Total
$
398,282
406,814
We also pledge certain financial instruments that we own to
collateralize repurchase agreements and other securities
financings. The types of collateral we pledge include securities
issued by federal agencies, government-sponsored entities
(GSEs), and domestic and foreign companies. We pledged
$20.8 billion at December 31, 2011, and $27.3 billion at
December 31, 2010, under agreements that permit the secured
parties to sell or repledge the collateral. Pledged collateral where
the secured party cannot sell or repledge was $2.8 billion and
$5.9 billion at the same period ends, respectively.
We receive collateral from other entities under resale
agreements and securities borrowings. We received $17.8 billion
at December 31, 2011, and $22.5 billion at December 31, 2010,
for which we have the right to sell or repledge the collateral.
These amounts include securities we have sold or repledged to
others with a fair value of $16.7 billion at December 31, 2011,
and $14.6 billion at December 31, 2010.
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