Freddie Mac 2009 Annual Report Download - page 129

During 2009, the increase in the fair value of net assets, before capital transactions, was principally related to an
increase in the fair value of our mortgage loans and our investments in mortgage-related securities, resulting from higher
core spread income and net tightening of mortgage-to-debt OAS. The increase in fair value was partially offset by an
increase in the guarantee obligation related to the declining credit environment. Included in the reduction of the fair value of
net assets, before capital transactions, is $3.5 billion related to our partial valuation allowance against our deferred tax assets,
net recorded during 2009.
During 2008, the fair value of net assets, before capital transactions, declined due primarily to an increase in the
guarantee obligation, primarily attributable to the market’s pricing of mortgage credit, and the impact of net mortgage-to-
debt OAS widening, primarily related to our non-agency mortgage related securities. This decline in fair value was partially
offset by higher estimated core spread income.
When the OAS on a given asset widens, the fair value of that asset will typically decline, all other things being equal.
However, we believe such OAS widening has the effect of increasing the likelihood that, in future periods, we will recognize
income at a higher spread on this existing asset. The reverse is true when the OAS on a given asset tightens — current
period fair values for that asset typically increase due to the tightening in OAS, while future income recognized on the asset
is more likely to be earned at a reduced spread. However, as market conditions change, our estimate of expected fair value
gains and losses from OAS may also change, and the actual core spread income recognized in future periods could be
significantly different from current estimates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our business activities involve various inflows and outflows of cash and require that we maintain adequate liquidity to
fund our operations, which may include the need to make payments of principal and interest on our debt securities and on
our PCs and Structured Securities; make payments upon the maturity, redemption or repurchase of our debt securities; make
net payments on derivative instruments; pay dividends on our senior preferred stock; purchase mortgage-related securities
and other investments; and purchase mortgage loans, including modified or delinquent loans from PC pools.
Under an agreement with FHFA, we maintain and periodically test a liquidity management and contingency plan.
Pursuant to this agreement, FHFA periodically assesses the size of our liquidity position.
We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:
• receipts of principal and interest payments on securities or mortgage loans we hold;
• other cash flows from operating activities, including guarantee activities;
• borrowings against mortgage-related securities and other investment securities we hold; and
• sales of securities we hold.
Under the amendment to the Purchase Agreement adopted on December 24, 2009, the $200 billion cap on Treasury’s
funding commitment will increase as necessary to accommodate any cumulative reduction in our net worth during 2010,
2011 and 2012. While we believe that the increased support provided by Treasury pursuant to the December 2009
amendment to the Purchase Agreement will be sufficient to enable us to maintain our access to the debt markets and ensure
that we have adequate liquidity to conduct our normal business activities over the next three years, the costs of our debt
funding could vary. For example, our funding costs for debt with maturities beyond 2012 could be high. In addition,
uncertainty about the future of the GSEs could affect our debt funding costs. We received $36.9 billion in cash from
Treasury pursuant to draws under the Purchase Agreement during 2009. As discussed below, market and other factors could
continue to limit the availability of our investments in mortgage-related securities as a significant source of funding.
We measure our cash position on a daily basis, netting uses of cash with sources of cash. We manage our net cash
position with the goal of providing debt funds to cover expected net cash outflows without adversely affecting overall
funding costs. Our approach to liquidity management has four components:
• maintain a portfolio of liquid, marketable, non-mortgage securities with a market value of at least $20 billion,
consisting of designated securities with maturities greater than 21 days or designated money market instruments. At
least 50% of these investments are in U.S. Treasuries. The credit quality of these investments is reviewed and
monitored on a daily basis;
• maintain a cash balance sufficient to cover our maximum cash liquidity needs for at least the next 21 calendar days,
but not more than 60 days, assuming no access to the short- and long-term unsecured debt markets, exclusive of the
$20 billion portfolio requirement. The funds required to meet these near term cash obligations are invested in high
credit quality short-term (less than 21 days) liquid investments;
126 Freddie Mac