Freddie Mac 2009 Annual Report Download - page 22

Purchase Agreement or any dividends or quarterly commitment fees payable under the Purchase Agreement that are not paid
in cash. The amounts payable for dividends on the senior preferred stock are substantial and will have an adverse impact on
our financial position 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.
The continuing weakness in the financial and housing markets, further GAAP net losses and our implementation on
January 1, 2010 of changes to the accounting standards for transfers of financial assets and consolidation of VIEs make it
more likely that we will continue to have additional draws under the Purchase Agreement in future periods. There is
significant uncertainty as to our future capital structure and long-term financial sustainability, and there are likely to be
significant changes to our current capital structure and business model beyond the near-term that we expect to be decided by
Congress and the Executive Branch.
On February 18, 2010, we received a letter from the Acting Director of FHFA stating that FHFA has determined that
any sale of the LIHTC investments by Freddie Mac would require Treasury’s consent under the terms of the Purchase
Agreement. The letter further stated that FHFA had presented other options for Treasury to consider, including allowing
Freddie Mac to pay senior preferred stock dividends by waiving the right to claim future tax benefits of the LIHTC
investments. However, after further consultation with Treasury and consistent with the terms of the Purchase Agreement, the
Acting Director informed us we may not sell or transfer the assets and that he sees no other disposition options. As a result,
we wrote down the carrying value of our LIHTC investments to zero as of December 31, 2009, resulting in a loss of
$3.4 billion. This write-down reduces our net worth at December 31, 2009 and, as such, increases the likelihood that we will
require additional draws from Treasury under the Purchase Agreement and, as a consequence, increases the likelihood that
our dividend obligation on the senior preferred stock will increase. See “NOTE 5: VARIABLE INTEREST ENTITIES” to
our consolidated financial statements for additional information.
The Purchase Agreement includes significant restrictions on our ability to manage our business, including limiting the
amount of indebtedness we can incur and capping the size of our mortgage-related investments portfolio as of December 31,
2009. See “MD&A — OUR PORTFOLIOS” for a description and composition of our portfolios. While the senior preferred
stock is outstanding, we are prohibited from paying dividends (other than on the senior preferred stock) or issuing equity
securities without Treasury’s consent.
The Purchase Agreement has an indefinite term and can terminate only in limited circumstances, which do not include
the end of the conservatorship. The Purchase Agreement therefore could continue after the conservatorship ends. Treasury
has the right to exercise the warrant, in whole or in part, at any time on or before September 7, 2028. We provide more
detail about the provisions of the Purchase Agreement, the senior preferred stock and the warrant, the limited circumstances
under which those agreements terminate, and the limitations they place on our ability to manage our business under
“Treasury Agreements” below. See “RISK FACTORS” for a discussion of how the restrictions under the Purchase Agreement
may have a material adverse effect on our business.
Supervision of our Business During Conservatorship
We experienced a change in control when we were placed into conservatorship on September 6, 2008. Under
conservatorship, we have additional heightened supervision and direction from our regulator, FHFA, which is also acting as
our Conservator. As Conservator, FHFA has succeeded to the powers of our Board of Directors and management, as well as
the powers of our stockholders. During the conservatorship, the Conservator delegated certain authority to the Board of
Directors to oversee, and management to conduct, day-to-day operations so that the company can continue to operate in the
ordinary course of business. The Conservator retains the authority to withdraw its delegations of authority at any time.
Because the Conservator succeeded to the powers, including voting rights, of our stockholders, who therefore do not
currently have voting rights of their own, we do not expect to hold stockholders’ meetings during the conservatorship, nor
will we prepare or provide proxy statements for the solicitation of proxies.
Our Board of Directors and Management During Conservatorship
While in conservatorship, we can, and have continued to, enter into and enforce contracts with third parties. The
Conservator continues to work with the Board of Directors and management to address and determine the strategic direction
for the company.
The Conservator instructed the Board of Directors that it should consult with and obtain the approval of the Conservator
before taking action in the following areas:
• actions involving capital stock, dividends, the Purchase Agreement, increases in risk limits, material changes in
accounting policy, and reasonably foreseeable material increases in operational risk;
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