Wells Fargo 2013 Annual Report Download - page 204

Note 14: Guarantees, Pledged Assets and Collateral (continued)
STANDBY LETTERS OF CREDIT We issue standby letters of
credit, which include performance and financial guarantees, for
customers in connection with contracts between our customers
and third parties. Standby letters of credit are agreements where
we are obligated to make payment to a third party on behalf of a
customer in the event the customer fails to meet their
contractual obligations. We consider the credit risk in standby
letters of credit and commercial and similar letters of credit in
determining the allowance for credit losses. Standby letters of
credit include direct pay letters of credit we issue to provide
credit enhancements for certain bond issuances.
SECURITIES LENDING AND OTHER INDEMNIFICATIONS As
a securities lending agent, we lend debt and equity securities
from participating institutional clients’ portfolios to third-party
borrowers. These arrangements are for an indefinite period of
time whereby we indemnify our clients against default by the
borrower in returning these lent securities. This indemnity is
supported by collateral received from the borrowers and is
generally in the form of cash or highly liquid securities that are
marked to market daily. There was $346 million at
December 31, 2013 and $443 million at December 31, 2012, in
collateral supporting loaned securities with values of $337
million and $436 million, respectively.
We use certain third party clearing agents to clear and settle
transactions on 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. 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 were
$769 million and $579 million and the related collateral was
$3.7 billion and $3.1 billion at December 31, 2013, and
December 31, 2012, respectively. Our estimate of maximum
exposure to loss, which requires judgment regarding the range
and likelihood of future events, was $2.9 billion as of
December 31, 2013, and $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 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 securitizations
and VIEs.
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 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. During 2013 and
2012 we repurchased $33 million and $26 million, respectively,
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.
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