Wells Fargo 2010 Annual Report Download - page 153

COLLATERALIZED LOAN OBLIGATIONS (CLOs) A CLO is a
securitization where an SPE purchases a pool of assets consisting
of loans and issues multiple tranches of equity or notes to
investors. Generally, CLOs are structured on behalf of a third
party asset manager that typically selects and manages the assets
for the term of the CLO. Typically, the asset manager has the
power over the significant decisions of the VIE through its
discretion to manage the assets of the CLO. We assess whether
we are the primary beneficiary of CLOs based on our role in the
transaction and the variable interests we hold. In most cases, we
are not the primary beneficiary of these transactions because we
do not have the power to manage the collateral in the VIE.
In addition to our role as arranger, we may have other forms
of involvement with these transactions. Such involvement may
include acting as underwriter, derivative counterparty,
secondary market maker or investor. For certain transactions,
we may also act as the servicer, for which we receive fees in
connection with that role. We also earn fees for arranging these
transactions and distributing the securities.
ASSET-BASED FINANCE STRUCTURES We engage in various
forms of structured finance arrangements with VIEs that are
collateralized by various asset classes including energy contracts,
auto and other transportation leases, intellectual property,
equipment and general corporate credit. We typically provide
senior financing, and may act as an interest rate swap or
commodity derivative counterparty when necessary. In most
cases, we are not the primary beneficiary of these structures
because we do not have power over the significant activities of
the VIEs involved in these transactions.
For example, we have investments in asset-backed securities
that are collateralized by auto leases or loans and cash reserves.
These fixed-rate and variable-rate securities have been
structured as single-tranche, fully amortizing, unrated bonds
that are equivalent to investment-grade securities due to their
significant overcollateralization. The securities are issued by
VIEs that have been formed by third party auto financing
institutions primarily because they require a source of liquidity
to fund ongoing vehicle sales operations. The third party auto
financing institutions manage the collateral in the VIEs, which is
indicative of power in these transactions and we therefore do not
consolidate these VIEs.
TAX CREDIT STRUCTURES We co-sponsor and make
investments in affordable housing and sustainable energy
projects that are designed to generate a return primarily through
the realization of federal tax credits. In some instances, our
investments in these structures may require that we fund future
capital commitments at the discretion of the project sponsors.
While the size of our investment in a single entity may at times
exceed 50% of the outstanding equity interests, we do not
consolidate these structures due to the project sponsor’s ability
to manage the projects, which is indicative of power in these
transactions.
INVESTMENT FUNDS At December 31, 2010, we had
investments of $1.4 billion and lending arrangements of
$14 million with certain funds managed by one of our majority
owned subsidiaries compared with investments of $1.3 billion
and lending arrangements of $20 million at December 31, 2009.
In addition, we also provide a default protection agreement to a
third party lender to one of these funds. Our involvement in
these funds is either senior or of equal priority to third party
investors. We do not consolidate the investment funds because
we do not absorb the majority of the expected future variability
associated with the funds’ assets, including variability associated
with credit, interest rate and liquidity risks.
OTHER TRANSACTIONS WITH VIEs In August 2008, Wachovia
reached an agreement to purchase at par auction rate securities
(ARS) that were sold to third-party investors by certain of its
subsidiaries. ARS are debt instruments with long-term
maturities, but which re-price more frequently, and preferred
equities with no maturity. All remaining ARS issued by VIEs
subject to the agreement were redeemed. At December 31, 2010,
we held in our securities available-for-sale portfolio $1.6 billion
of ARS issued by VIEs redeemed pursuant to this agreement,
compared with $3.2 billion at December 31, 2009.
On November 18, 2009, we reached agreements to purchase
additional ARS from eligible investors who bought ARS through
one of our broker-dealer subsidiaries. All remaining ARS issued
by VIEs subject to the agreement were redeemed. As of
December 31, 2010, we held in our securities available-for-sale
portfolio $892 million of ARS issued by VIEs redeemed pursuant
to this agreement. No securities had been redeemed related to
this agreement at December 31, 2009.
We do not consolidate the VIEs that issued the ARS because
we do not have power over the activities of the VIEs.
TRUST PREFERRED SECURITIES In addition to the
involvements disclosed in the preceding table, we had
$19.3 billion and $19.1 billion of junior subordinated debt
financing through the issuance of trust preferred securities at
December 31, 2010 and 2009, respectively. In these
transactions, VIEs that we wholly own issue preferred equity or
debt securities to third party investors. All of the proceeds of the
issuance are invested in debt securities that we issue to the VIEs.
The VIEs’ operations and cash flows relate only to the issuance,
administration and repayment of the securities held by third
parties. We do not consolidate these VIEs because the sole assets
of the VIEs are receivables from us. This is the case even though
we own all of the voting equity shares of the VIEs, have fully
guaranteed the obligations of the VIEs and may have the right to
redeem the third party securities under certain circumstances.
We report the debt securities that we issue to the VIEs as long-
term debt in our consolidated balance sheet. See Note 13 and
Note 17 for additional information related to our trust preferred
security issuances.
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