Fannie Mae 2010 Annual Report Download - page 268

a request for an additional $2.6 billion from Treasury to eliminate our net worth deficit as of December 31,
2010. The aggregate liquidation preference of the senior preferred stock was $88.6 billion as of December 31,
2010 and will increase to $91.2 billion as a result of FHFA’s request on our behalf for funds to eliminate our
net worth deficit as of December 31, 2010.
On September 7, 2008, we issued a warrant to Treasury giving it the right to purchase, at a nominal price,
shares of our common stock equal to 79.9% of the total common stock outstanding on a fully diluted basis on
the date Treasury exercises the warrant. Treasury has the right to exercise the warrant, in whole or in part, at
any time on or before September 7, 2028. We recorded the warrant at fair value in our stockholders’ equity as
a component of additional paid-in-capital. The fair value of the warrant was calculated using the Black-
Scholes Option Pricing Model. Since the warrant has an exercise price of $0.00001 per share, the model is
insensitive to the risk-free rate and volatility assumptions used in the calculation and the share value of the
warrant is equal to the price of the underlying common stock. We estimated that the fair value of the warrant
at issuance was $3.5 billion based on the price of our common stock on September 8, 2008, which was after
the dilutive effect of the warrant had been reflected in the market price. Subsequent changes in the fair value
of the warrant are not recognized in the financial statements. If the warrant is exercised, the stated value of the
common stock issued will be reclassified as “Common stock” in our consolidated balance sheets. Because the
warrant’s exercise price per share is considered non-substantive (compared to the market price of our common
stock), the warrant was determined to have characteristics of non-voting common stock, and thus is included
in the computation of basic and diluted loss per share. The weighted-average shares of common stock
outstanding for the years ended December 31, 2010, 2009 and 2008, included shares of common stock that
would be issuable upon full exercise of the warrant issued to Treasury.
Impact of U.S. Government Support
We are dependent upon the continued support of Treasury to eliminate our net worth deficit, which avoids our
being placed into receivership. Based on consideration of all the relevant conditions and events affecting our
operations, including our dependence on the U.S. Government, we continue to operate as a going concern and
in accordance with our delegation of authority from FHFA.
Pursuant to the amended senior preferred stock purchase agreement, Treasury has committed to provide us
with funding as needed to help us maintain a positive net worth thereby avoiding the mandatory receivership
trigger described above.
We fund our business primarily through the issuance of short-term and long-term debt securities in the
domestic and international capital markets. Because debt issuance is our primary funding source, we are
subject to “roll-over,” or refinancing, risk on our outstanding debt. Our ability to issue long-term debt has been
strong in 2009 and 2010 primarily due to actions taken by the federal government to support us and the
financial markets. Demand for our long-term debt securities continues to be strong.
We believe that continued federal government support of our business and the financial markets, as well as our
status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the
government’s support could materially adversely affect our ability to refinance our debt as it becomes due,
which could have a material adverse impact on our liquidity, financial condition and results of operations. In
addition, future changes or disruptions in the financial markets could significantly change the amount, mix and
cost of funds we obtain, which also could increase our liquidity and roll-over risk and have a material adverse
impact on our liquidity, financial condition and results of operations.
On February 11, 2011, Treasury and HUD released a report to Congress on reforming America’s housing
finance market. The report provides that the Administration will work with FHFA to determine the best way to
responsibly reduce Fannie Mae’s and Freddie Mac’s role in the market and ultimately wind down both
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FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)