Freddie Mac 2009 Annual Report Download - page 128

Asset-Liability Management Return
Asset-liability management return represents the estimated net increase or decrease in the fair value of net assets
resulting from net exposures related to the market risks we actively manage. We do not hedge all of the interest-rate risk that
exists at the time a mortgage is purchased or that arises over its life. The market risks to which we are exposed as a result of
our investment activities that we actively manage include duration and convexity risks, yield curve risk and volatility risk.
We seek to manage these risk exposures within prescribed limits as part of our overall investment strategy. Taking these
risk positions and managing them within prudent limits is an integral part of our investment activity. We expect that the net
exposures related to market risks we actively manage will generate fair value returns, although those positions may result in
a net increase or decrease in fair value for a given period. See “QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK — Interest-Rate Risk and Other Market Risks” for more information.
Core Management and Guarantee Fees, Net
Core management and guarantee fees, net represents a fair value estimate of the annual income of the credit guarantee
portfolio, based on current portfolio characteristics and market conditions. This estimate considers both contractual
management and guarantee fees collected over the life of the credit guarantee portfolio and credit-related delivery fees
collected up front when pools are formed, and associated costs and obligations, which include default costs.
Change in the Fair Value of the Credit Guarantee Portfolio
Change in the fair value of the credit guarantee portfolio represents the estimated impact on the fair value of the credit
guarantee business resulting from additions to the portfolio (the net difference between the fair values of the guarantee asset
and guarantee obligation recorded when pools are formed) plus the effect of changes in interest rates, projections of the
future credit outlook and other market factors (e.g., impact of the passage of time on cash flow discounting). Our estimated
fair value of the credit guarantee portfolio will change as credit conditions change.
We generally do not hedge changes in the fair value of our existing credit guarantee portfolio, with two exceptions
discussed below. While periodic changes in the fair value of the credit guarantee portfolio may have a significant impact on
the fair value of net assets, we believe that changes in the fair value of our existing credit guarantee portfolio are not the
best indication of long-term fair value expectations because such changes do not reflect our expectation that, over time,
replacement business will largely replenish management and guarantee fee income lost because of prepayments. However, to
the extent that projections of the future credit outlook reflected in the changes in fair value are realized, our fair value results
may be affected.
We hedge interest rate exposure related to net buy-ups (up front payments we make that increase the management and
guarantee fee that we will receive over the life of the pool) and float (expected gains or losses resulting from our mortgage
security program remittance cycles). These value changes are excluded from our estimate of the changes in fair value of the
credit guarantee portfolio, so that it reflects only the impact of changes in interest rates and other market factors on the
unhedged portion of the projected cash flows from the credit guarantee business. The fair value changes associated with net
buy-ups and float are considered in asset-liability management return (described above) because they relate to hedged
positions.
Discussion of Fair Value Results
During 2009, the fair value of net assets, before capital transactions, increased by $0.3 billion, compared to a
$120.9 billion decrease during 2008. During 2009, fair value increased by $36.9 billion as a result of the receipt of funding
from Treasury under the Purchase Agreement, partially offset by the payment in cash of senior preferred stock dividends, net
of reissuance of treasury stock, which reduced total fair value by $4.1 billion. The fair value of net assets as of
December 31, 2009 was $(62.5) billion, compared to $(95.6) billion as of December 31, 2008.
Table 45 summarizes the change in the fair value of net assets for 2009 and 2008.
Table 45 — Summary of Change in the Fair Value of Net Assets
2009 2008
(in billions)
Beginning balance .......................................................................... $(95.6) $ 12.6
Changes in fair value of net assets, before capital transactions .......................................... 0.3 (120.9)
Capital transactions:
Dividends, share repurchases and issuances, net
(1)
................................................. 32.8 12.7
Ending balance . ........................................................................... $(62.5) $ (95.6)
(1) Includes the funds received from Treasury of $36.9 billion and $13.8 billion for 2009 and 2008, respectively, under the Purchase Agreement, which
increased the liquidation preference of our senior preferred stock.
125 Freddie Mac