Freddie Mac 2009 Annual Report Download - page 130

• maintain unencumbered collateral of at least 1.25 times the largest cash needs for the next 365 calendar days,
assuming no access to the short- and long-term unsecured debt markets. The available collateral for this purpose is
reviewed and monitored on a daily basis, and consists of unencumbered mortgage-related securities; and
• manage our debt issuances to remain in compliance with the aggregate indebtedness limits set forth in the Purchase
Agreement.
The Lending Agreement expired on December 31, 2009, and therefore we no longer have a liquidity backstop available
to us (other than draws from Treasury under the Purchase Agreement and Treasury’s ability to purchase up to $2.25 billion
of our obligations under its permanent statutory authority) if we are unable to obtain funding from issuances of debt or other
conventional sources. At present, we are not able to predict the likelihood that a liquidity backstop will be needed, or to
identify the alternative sources of liquidity that might then be available to us, other than from Treasury as referenced above.
No amounts were borrowed under the Lending Agreement, which expired on December 31, 2009.
We may require cash in order to fulfill our mortgage purchase commitments. Historically, we fulfilled our purchase
commitments related to our mortgage purchase flow business primarily by swap transactions, whereby our customers
exchanged mortgage loans for PCs, rather than through cash outlays. However, it is at the discretion of the seller, subject to
limitations imposed by the contract governing the commitment, whether the purchase commitment is fulfilled by a swap
transaction or through the exchange of cash. We provide liquidity to our seller/servicers through our cash purchase program.
Loans purchased through the cash purchase program are typically sold to investors through a cash auction of PCs, and, in the
interim, are carried as mortgage loans on our consolidated balance sheets. See “OFF-BALANCE SHEET
ARRANGEMENTS — Other” for additional information regarding our purchase commitments at December 31, 2009.
We make extensive use of the Fedwire System in our business activities. For use of the Fedwire system, the Federal
Reserve requires that we fully fund our account in the system to the extent necessary to cover payments on our debt and
mortgage-related securities each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will initiate
such payments. We have an open line of credit with a third party, which provides intraday liquidity to fund our activities
through the Fedwire system. This line of credit is an uncommitted intraday loan facility. As a result, while we expect to
continue to use the facility, we may not be able to draw on it, if and when needed. This line of credit requires that we post
collateral that, in certain circumstances, the secured party has the right to repledge to other third parties, including the
Federal Reserve Bank. As of December 31, 2009, we pledged approximately $10.8 billion of securities to this secured party.
See “NOTE 6: INVESTMENTS IN SECURITIES — Collateral Pledged” to our consolidated financial statements for further
information.
Depending on market conditions and the mix of derivatives we employ in connection with our ongoing risk
management activities, our derivative portfolio can be either a net source or a net use of cash. For example, depending on
the prevailing interest-rate environment, interest-rate swap agreements could cause us either to make interest payments to
counterparties or to receive interest payments from counterparties. Purchased options require us to pay a premium while
written options allow us to receive a premium.
We are required to pledge collateral to third parties in connection with secured financing and daily trade activities. In
accordance with contracts with certain derivative counterparties, we post collateral to those counterparties for derivatives in a
net loss position, after netting by counterparty, above agreed-upon posting thresholds. See “NOTE 6: INVESTMENTS IN
SECURITIES — Collateral Pledged” to our consolidated financial statements for information about assets we pledge as
collateral.
We are involved in various legal proceedings, including those discussed in “LEGAL PROCEEDINGS,” which may
result in a use of cash in order to settle claims or pay certain costs.
Dividend Obligation on the Senior Preferred Stock
Based on the current aggregate liquidation preference of the senior preferred stock, Treasury is entitled to annual cash
dividends of $5.2 billion, which exceeds our annual historical earnings in most periods. The senior preferred stock accrues
quarterly cumulative dividends at a rate of 10% per year or 12% per year in any quarter in which dividends are not paid in
cash until all accrued dividends have been paid in cash. We paid a quarterly dividend of $1.3 billion in cash on the senior
preferred stock on December 31, 2009 at the direction of our Conservator. To date, we have paid $4.3 billion in cash
dividends on the senior preferred stock. Continued cash payment of senior preferred dividends, combined with potentially
substantial quarterly commitment fees payable to Treasury beginning in 2011 (the amounts of which must be determined by
December 31, 2010) will have an adverse impact on our future financial condition and net worth.
The payment of dividends on our senior preferred stock in cash reduces our net worth. For periods in which our
earnings and other changes in equity do not result in positive net worth, draws under the Purchase Agreement effectively
fund the cash payment of senior preferred dividends to Treasury. Under the Purchase Agreement, our ability to repay the
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