Freddie Mac 2005 Annual Report Download - page 163

values of the related derivatives. This time lag in posting collateral can aÅect our net uncollateralized exposure to derivative
counterparties.
Collateral posted by a derivative counterparty is typically in the form of cash, U.S. Treasury securities, our PCs and
Structured Securities or our debt securities. In the event a counterparty defaults on its obligations under the derivatives
agreement and the default is not remedied in the manner prescribed in the agreement, we have the right under the agreement
to direct the custodian bank to transfer the collateral to us or, in the case of non-cash collateral, to sell the collateral and
transfer the proceeds to us.
Our uncollateralized exposure to counterparties for OTC interest-rate swaps, option-based derivatives and foreign-
currency swaps, after applying netting agreements and collateral, was $190 million and $601 million at December 31, 2005
and 2004, respectively. In the event that all of our counterparties for these derivatives were to have defaulted simultaneously
on December 31, 2005, our maximum loss for accounting purposes would have been approximately $190 million.
Our exposure to counterparties for OTC forward purchase and sale commitments treated as derivatives was $35 million
and $40 million at December 31, 2005 and 2004, respectively. Since the typical maturity for our OTC commitments is less
than one year, we do not require master netting and collateral agreements for the counterparties of these commitments.
Therefore, the exposure to our OTC commitments counterparties is uncollateralized. Similar to counterparties for our OTC
interest-rate swaps, option-based derivatives and foreign-currency swaps, we monitor the credit fundamentals of our OTC
commitments counterparties on an ongoing basis to ensure that they continue to meet our internal risk-management
standards.
NOTE 18: MINORITY INTERESTS
The equity and net earnings attributable to the minority stockholder interests in consolidated subsidiaries are reported
on our consolidated balance sheets as Minority interests in consolidated subsidiaries and on our consolidated statements of
income as Minority interests in earnings of consolidated subsidiaries. The majority of the balances in these accounts relate
to our two majority-owned REITs.
In February 1997, we formed two majority-owned REIT subsidiaries funded through the issuance of common stock
(99.9 percent of which is held by us) and a total of $4.0 billion of perpetual, step-down preferred stock issued to outside
investors. The dividend rate on the step-down preferred stock is 13.3 percent from initial issuance through December 2006
(the initial term). Beginning in 2007, the dividend rate will step-down to 1.0 percent. Dividends on this preferred stock
accrue in arrears. The balance of the two step-down preferred stock issuances as recorded within Minority interests in
consolidated subsidiaries on our consolidated balance sheets totaled $934 million and $1,488 million at December 31, 2005
and 2004, respectively.
On November 10, 2005, we oÅered to purchase for cash any and all of the outstanding shares of the outstanding step-
down preferred stock, of which $142 million was purchased between the oÅer date and December 31, 2005. The preferred
stock continues to be redeemable by the REITs under certain circumstances described in the preferred stock oÅering
documents as a ""tax event redemption.'' See ""NOTE 14: INCOME TAXES'' for more information concerning the REITs.
NOTE 19: EARNINGS PER COMMON SHARE
Basic earnings per common share are computed as Net income available to common stockholders divided by Weighted
average common shares outstanding-basic for the period. Diluted earnings per common share are computed as Net income
available to common stockholders divided by Weighted average common shares outstanding-diluted for the period, which
consider the eÅect of dilutive common equivalent shares outstanding. The eÅect of dilutive common equivalent shares
outstanding includes: (a) the weighted average shares related to stock options (including the ESPP) that have an exercise
price lower than the average market price during the period; (b) the weighted average of non-vested restricted shares; and
(c) all restricted stock units. Such items are excluded from Weighted average common shares outstanding Ì basic. See
""NOTE 11: STOCK-BASED COMPENSATION'' for additional information. Net income available to common stock-
holders is not aÅected by dilutive potential common shares for the years ended December 31, 2005, 2004 and 2003. For the
years ended December 31, 2005, 2004 and 2003, there are approximately 1,929,000, 2,239,000 and 1,581,000 of dilutive
common equivalent shares outstanding that could potentially dilute earnings per common share, based on the treasury stock
method.
Options to purchase 2.3 million, 2.4 million and 3.4 million shares of common stock were excluded from the
computation of Diluted earnings per common share at December 31, 2005, 2004 and 2003, respectively, because the options'
exercise price exceeded the average market price of the common stock for the years ended December 31, 2005, 2004 and
2003, respectively.
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