Wells Fargo 2012 Annual Report Download - page 108

Risk Factors (continued)
temporary usually requires difficult, subjective judgments about
the future financial performance of the issuer and any collateral
underlying the security in order to assess the probability of
receiving contractual principal and interest payments on the
security. Because of changing economic and market conditions,
as well as credit ratings, affecting issuers and the performance of
the underlying collateral, we may be required to recognize OTTI
in future periods. Our net income also is exposed to changes in
interest rates, credit spreads, foreign exchange rates, equity and
commodity prices in connection with our trading activities,
which are conducted primarily to accommodate our customers in
the management of their market price risk, as well as when we
take positions based on market expectations or to benefit from
differences between financial instruments and markets. The
securities held in these activities are carried at fair value with
realized and unrealized gains and losses recorded in noninterest
income. As part of our business to support our customers, we
trade public securities and these securities also are subject to
market fluctuations with gains and losses recognized in net
income when realized and periodically include OTTI charges.
Although we have processes in place to measure and monitor the
risks associated with our trading activities, including stress
testing and hedging strategies, there can be no assurance that
our processes and strategies will be effective in avoiding losses
that could have a material adverse effect on our financial results.
The value of our public and private equity investments can
fluctuate from quarter to quarter. Certain of these investments
are carried under the cost or equity method, while others are
carried at fair value with unrealized gains and losses reflected in
earnings. Earnings from our equity investments may be volatile
and hard to predict, and may have a significant effect on our
earnings from period to period. When, and if, we recognize gains
may depend on a number of factors, including general economic
and market conditions, the prospects of the companies in which
we invest, when a company goes 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
OTTI losses for those investments carried under the cost or
equity method. Our assessment for OTTI is based on a number of
factors, including the then current market value of each
investment compared with its carrying value. If we determine
there is OTTI for an investment, we write-down the carrying
value of the investment, resulting in a charge to earnings. The
amount of this charge could be significant.
For more information, refer to the “Risk Management –
Asset/Liability Management – Interest Rate Risk”, “– Market
Risk – Equity Markets”, and “– Market Risk – Trading
Activities” and the “Balance Sheet Analysis – Securities Available
for Sale” sections in this Report and Note 5 (Securities Available
for Sale) to Financial Statements in this Report.
Effective liquidity management, which ensures that we
can meet customer loan requests, customer deposit
maturities/withdrawals and other cash commitments,
including principal and interest payments on our debt,
efficiently under both normal operating conditions and
other unpredictable circumstances of industry or
financial market stress, is essential for the operation of
our business, and our financial results and condition
could be materially adversely affected if we do not
effectively manage our liquidity. Our liquidity is essential
for the operation of our business. We primarily rely on bank
deposits to be a low cost and stable source of funding for the
loans we make and the operation of our business. Core customer
deposits, which include noninterest-bearing deposits, interest-
bearing checking, savings certificates, certain market rate and
other savings, and certain foreign deposits, have historically
provided us with a sizeable source of relatively stable and low-
cost funds. In addition to customer deposits, our sources of
liquidity include investments in our securities portfolio, our
ability to sell or securitize loans in secondary markets and to
pledge loans to access secured borrowing facilities through the
FHLB and the FRB, and our ability to raise funds in domestic
and international money and capital markets.
Our liquidity and our ability to fund and run our business
could be materially adversely affected by a variety of conditions
and factors, including financial and credit market disruption and
volatility or a lack of market or customer confidence in financial
markets in general similar to what occurred during the financial
crisis in 2008 and early 2009, which may result in a loss of
customer deposits or outflows of cash or collateral and/or our
inability to access capital markets on favorable terms. Market
disruption and volatility could impact our credit spreads, which
are the amount in excess of the interest rate of U.S. Treasury
securities, or other benchmark securities, of the same maturity
that we need to pay to our funding providers. Increases in
interest rates and our credit spreads could significantly increase
our funding costs. Other conditions and factors that could
materially adversely affect our liquidity and funding include a
lack of market or customer confidence in the Company or
negative news about the Company or the financial services
industry generally which also may result in a loss of deposits
and/or negatively affect our ability to access the capital markets;
our inability to sell or securitize loans or other assets, and, as
described below, reductions in one or more of our credit ratings.
Many of the above conditions and factors may be caused by
events over which we have little or no control. While market
conditions have continued to improve since the financial crisis,
there can be no assurance that significant disruption and
volatility in the financial markets will not occur in the future. For
example, in the summer of 2011 concerns regarding the potential
failure to raise the U.S. government debt limit and the eventual
downgrade of U.S. government debt ratings and the so called
“fiscal cliff” concerns in the second half of 2012 associated with
the possibility of U.S. spending cuts and tax increases, which
were scheduled to go into effect on January 1, 2013, caused
uncertainty and some volatility in financial markets. A failure to
raise the U.S. debt limit in the future and/or additional
downgrades of the sovereign debt ratings of the U.S. government
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