Wells Fargo 2012 Annual Report Download - page 190

Note 14: Guarantees, Pledged Assets and Collateral (continued)
behalf of some of our institutional brokerage customers. We
indemnify the clearing agents against loss that could occur for
non-performance by our customers on transactions that are not
sufficiently collateralized. These arrangements are for an
indefinite period. Transactions subject to the indemnifications
may include customer obligations related to the settlement of
margin accounts and short positions, such as written call options
and securities borrowing transactions. Outstanding customer
obligations and related collateral were $579 million and $3.1
billion, respectively, as of December 31, 2012. Our estimate of
maximum exposure to loss, which requires judgment regarding
the range and likelihood of future events, was $2.1 billion as of
December 31, 2012.
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, we are
unable to determine our potential future liability under these
agreements. We do, however, record a liability for residential
mortgage loans that we expect to repurchase pursuant to various
representations and warranties. See Note 9 for additional
information on the liability for mortgage loan repurchase losses.
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. The
terms of our written put options are largely five years or less. 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. Our recourse arrangements remain in
effect as long as the loans are outstanding, which predominantly
have remaining terms in excess of five years. During 2012, we
repurchased $26 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. 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. In November 2012,
the purchase options on the leasing transactions related to these
residual value guarantees were exercised; therefore we no longer
have any exposure related to these guarantees.
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.
OTHER GUARANTEES We are members of exchanges and
clearing houses that we use to clear our trades and those of our
customers. It is common that all members in these organizations
are required to collectively guarantee the performance of other
members. Our obligations under the guarantees are based on
either a fixed amount or a multiple of the collateral we are
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