Fifth Third Bank 2008 Annual Report Download - page 85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 83
of commercial loans held in its loan portfolio. For further
information on the QSPE, see Note 10.
At December 31, 2008 and 2007, the Bancorp had provided
credit recourse on residential mortgage loans sold to unrelated
third parties of approximately $1.3 billion and $1.5 billion,
respectively. In the event of any customer default, pursuant to the
credit recourse provided, the Bancorp is required to reimburse the
third party. The maximum amount of credit risk in the event of
nonperformance by the underlying borrowers is equivalent to the
total outstanding balance. For further information on the
residential mortgage loans sold with credit recourse, see Note 10.
FTS, a subsidiary of the Bancorp, guarantees the collection of
all margin account balances held by its brokerage clearing agent
for the benefit of FTS customers. FTS is responsible for payment
to its brokerage clearing agent for any loss, liability, damage, cost
or expense incurred as a result of customers failing to comply with
margin or margin maintenance calls on all margin accounts. The
margin account balance held by the brokerage clearing agent as of
December 31, 2008 was $10 million compared to $48 million as of
December 31, 2007. In the event of any customer default, FTS
has rights to the underlying collateral provided. Given the
existence of the underlying collateral provided and negligible
historical credit losses, the Bancorp does not maintain a loss
reserve related to the margin accounts.
As of December 31, 2008 and 2007, the Bancorp had fully
and unconditionally guaranteed certain long-term borrowing
obligations issued by four wholly-owned issuing trust entities of
$2.8 billion and $2.3 billion, respectively. For further information
on long-term borrowing obligations, see Note 14.
The Bancorp, as a member bank of Visa prior to Visa’s
completion of their initial public offering (IPO) on March 19,
2008, had certain indemnification obligations pursuant to Visa’s
certificate of incorporation and bylaws and in accordance with
their membership agreements. In accordance with Visa’s by-laws
prior to the IPO, the Bancorp could have been required to
indemnify Visa for the Bancorp’s proportional share of losses
based on the pre-IPO membership interests. In contemplation of
the IPO, Visa announced that it had completed restructuring
transactions during the fourth quarter of 2007. As part of this
restructuring, the Bancorp’s indemnification obligation was
modified to include only certain known litigation as of the date of
the restructuring. This modification triggered a requirement to
recognize the fair value of the indemnification obligation in
accordance with FIN 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.” Accordingly, the Bancorp recorded an
indemnification liability under FIN 45 of $3 million in 2007.
Additionally, during 2007, the Bancorp recorded $169 million for
its share of litigation formally settled by Visa and for probable
future litigation settlements, resulting in a Visa litigation reserve of
$172 million as of December 31, 2007. These amounts were
accrued under SFAS No. 5, “Accounting for Contingencies.”
During 2008, the Bancorp recorded additional reserves of $71
million for probable future litigation settlements. In connection
with the IPO in 2008, Visa retained a portion of the proceeds to
fund an escrow account in order to resolve existing litigation
settlements as well as fund potential future litigation settlements.
As of December 31, 2008, the Bancorp has recorded its
proportional share of $169 million of the Visa escrow account net
against the current Visa litigation reserve of $243 million.
16. LEGAL AND REGULATORY PROCEEDINGS
In May of 2005, the Bancorp filed suit in the United States
District Court for the Southern District of Ohio against the IRS
seeking a refund of taxes paid as a result of the audit of the 1997
tax year. This suit involves a determination of the correct tax
treatment of certain leveraged leases entered into by the Bancorp.
The outcome of this litigation will likely impact a number of
leveraged leases entered into during 1997 through 2004. At the
conclusion of a jury trial, the jury rendered a verdict in the form of
answers to interrogatories, some of which favored the Bancorp
and some of which favored the IRS. No judgment has been
entered by the court in the case and the parties dispute the
judgment that should be entered in light of the jury’s responses to
the interrogatories. During the second quarter of 2008, the
Bancorp increased its liability for uncertain tax reserves relating to
these leases based upon several factors, including the jury’s verdict
in the Bancorp’s case, and two other court cases involving
leveraged leasing. In December of 2008, the Bancorp entered into
a Stipulated Conditional Dismissal. This Conditional Order of
Dismissal, without prejudice and with leave, allows the Bancorp to
enter into settlement discussions with the U.S. Department of
Justice under the Settlement Initiatives offered by the IRS. The
Stipulated Conditional Dismissal is effective until June of 2009.
In the event the case is not settled prior to June 2009, either party
may reinstate the case. The ultimate outcome of settlement
discussion is uncertain. The Bancorp continues to believe that its
tax treatment was proper under the tax law, as it existed at the
time the tax benefits were reported.
During April 2006, the Bancorp was added as a defendant in
a consolidated antitrust class action lawsuit originally filed against
Visa®, MasterCard® and several other major financial institutions
in the United States District Court for the Eastern District of
New York. The plaintiffs, merchants operating commercial
businesses throughout the U.S. and trade associations, claim that
the interchange fees charged by card-issuing banks are
unreasonable and seek injunctive relief and unspecified damages.
In addition to being a named defendant, the Bancorp is also
subject to an indemnification obligation of Visa as discussed in
Note 15. Accordingly, in the third and fourth quarters of 2007,
the Bancorp recorded a contingent liability included in the $172
million litigation reserve. During 2008, the Bancorp recorded
additional reserves of $71 million for probable future litigation
settlements. In connection with Visa’s IPO, Visa retained a
portion of the proceeds to fund an escrow account in order to
resolve existing litigation settlements as well as fund potential
future litigation settlements. As of December 31, 2008 the
Bancorp has recorded its proportional share of $169 million of the
Visa escrow accounts net against the current Visa litigation reserve
of $243 million to account for its potential exposure in this and
related litigation. This antitrust litigation is still in the pre-trial
phase.
Several putative class action complaints have been filed
against the Bancorp in various federal and state courts. The
federal cases were consolidated by the Judicial Panel on
Multidistrict Litigation and are now known as “In Re TJX Security
Breach Litigation.” The state court actions have been removed to
federal court and have been consolidated into that same case. The
complaints relate to the alleged intrusion of The TJX Companies,
Inc.’s (TJX) computer system and the potential theft of their
customers’ non-public information and alleged violations of the
Gramm-Leach-Bliley Act. Some of the complaints were filed by
consumers and seek unquantified damages on behalf of putative
classes of persons who transacted business at any one of TJX’s
stores during the period of the alleged intrusion. Another was
filed by financial institutions and seeks unquantified damages on
behalf of other similarly situated entities that suffered losses in
relation to the alleged intrusion. The U.S. District Court (Court)
has granted the Bancorp’s motion to dismiss certain of the claims,
but additional claims remain pending. On November 29, 2007,
the U.S. District Court, District of Massachusetts (District Court)
issued an order denying Plaintiffs’ Motion for Class Certification
in the consolidated cases brought by financial institutions (the
“Financial Institution Track”). On December 18, 2007, the