Freddie Mac 2009 Annual Report Download - page 271

Classification
Prior to FHFA’s suspension of our capital classifications in October 2008, FHFA assessed our capital adequacy not less
than quarterly.
To be classified as “adequately capitalized,” we must meet both the risk-based and minimum capital standards. If we
fail to meet the risk-based capital standard, we cannot be classified higher than “undercapitalized.” If we fail to meet the
minimum capital requirement but exceed the critical capital requirement, we cannot be classified higher than “significantly
undercapitalized.” If we fail to meet the critical capital standard, we must be classified as “critically undercapitalized.” In
addition, FHFA has discretion to reduce our capital classification by one level if FHFA determines in writing that (i) we are
engaged in conduct that could result in a rapid depletion of core or total capital, the value of collateral pledged as security
has decreased significantly, or the value of the property subject to mortgages held or securitized by us has decreased
significantly, (ii) we are in an unsafe or unsound condition or (iii) we are engaging in unsafe or unsound practices.
If we were classified as adequately capitalized, we generally could pay a dividend on our common or preferred stock or
make other capital distributions (which includes common stock repurchases and preferred stock redemptions) without prior
FHFA approval so long as the payment would not decrease total capital to an amount less than our risk-based capital
requirement and would not decrease our core capital to an amount less than our minimum capital requirement. However,
during conservatorship, the Conservator has instructed our Board of Directors that it should consult with and obtain the
approval of the Conservator before taking any actions involving capital stock and dividends. In addition, 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.
If we were classified as undercapitalized, we would be prohibited from making a capital distribution that would reduce
our core capital to an amount less than our minimum capital requirement. We also would be required to submit a capital
restoration plan for FHFA approval, which could adversely affect our ability to make capital distributions.
If we were classified as significantly undercapitalized, we would be prohibited from making any capital distribution that
would reduce our core capital to less than the critical capital level. We would otherwise be able to make a capital
distribution only if FHFA determined that the distribution would: (a) enhance our ability to meet the risk-based capital
standard and the minimum capital standard promptly; (b) contribute to our long-term financial safety and soundness; or
(c) otherwise be in the public interest. Also under this classification, FHFA could take action to limit our growth, require us
to acquire new capital or restrict us from activities that create excessive risk. We also would be required to submit a capital
restoration plan for FHFA approval, which could adversely affect our ability to make capital distributions.
If we were classified as critically undercapitalized, FHFA would have the authority to appoint a conservator or receiver
for us.
In addition, without regard for our capital classification, under the Reform Act, we are not permitted to make a capital
distribution if, after making the distribution, we would be undercapitalized, except the Director of FHFA may permit us to
repurchase shares if the repurchase is made in connection with the issuance of additional shares or obligations in at least an
equivalent amount and will reduce our financial obligations or otherwise improve our financial condition. Also without
regard to our capital classification, under Freddie Mac’s charter, we must obtain prior written approval of FHFA to make any
capital distribution that would decrease total capital to an amount less than the risk-based capital level or that would
decrease core capital to an amount less than the minimum capital level.
Performance Against Regulatory Capital Standards
Table 11.1 summarizes our minimum capital requirements and deficits and net worth.
Table 11.1 — Net Worth and Minimum Capital
December 31, 2009 December 31, 2008
(in millions)
GAAP net worth
(1)
............................................................ $ 4,372 $(30,634)
Core capital
(2)(3)
.............................................................. $(23,774) $(13,174)
Less: Minimum capital requirement
(2)
................................................ 28,352 28,200
Minimum capital surplus (deficit)
(2)
............................................... $(52,126) $(41,374)
(1) Net worth (deficit) represents the difference between our assets and liabilities under GAAP. With our adoption of an amendment to the accounting
standards for consolidation regarding noncontrolling interests in consolidated financial statements on January 1, 2009, our net worth is now equal to our
total equity (deficit). Prior to adoption of the amendment noted above, our total equity (deficit) was substantially the same as our net worth except that
it excluded non-controlling interests (previously referred to as minority interests). As a result non-controlling interests are now classified as part of total
equity (deficit).
(2) Core capital and minimum capital figures for December 31, 2009 are estimates. FHFA is the authoritative source for our regulatory capital.
(3) Core capital as of December 31, 2009 and 2008 excludes certain components of GAAP total equity (deficit) (i.e., AOCI, liquidation preference of the
senior preferred stock and non-controlling interests) as these items do not meet the statutory definition of core capital.
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