Freddie Mac 2009 Annual Report Download - page 272

Following our entry into conservatorship, we have focused our risk and capital management, consistent with the
objectives of conservatorship, on, among other things, maintaining a positive balance of GAAP equity in order to reduce the
likelihood that we will need to make additional draws on the Purchase Agreement with Treasury, while returning to long-
term profitability. The Purchase Agreement provides that, if FHFA determines as of quarter end that our liabilities have
exceeded our assets under GAAP, Treasury will contribute funds to us in an amount equal to the difference between such
liabilities and assets.
Under the Reform Act, FHFA must place us into receivership if FHFA determines in writing that our assets are and
have been less than our obligations for a period of 60 days. FHFA notified us that the measurement period for any
mandatory receivership determination with respect to our assets and obligations would commence no earlier than the SEC
public filing deadline for our quarterly or annual financial statements and would continue for 60 calendar days after that
date. FHFA advised us that, if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the
deficiency amount under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership
determination.
At December 31, 2009, our assets exceeded our liabilities by $4.4 billion. Because we had positive net worth as of
December 31, 2009, FHFA has not submitted a draw request on our behalf to Treasury for any additional funding under the
Purchase Agreement. Should our assets be less than our obligations, we must obtain funding from Treasury pursuant to its
commitment under the Purchase Agreement in order to avoid being placed into receivership by FHFA. We have received
$50.7 billion from Treasury under the Purchase Agreement to date. We expect to make additional draws under the Purchase
Agreement in future periods due to a variety of factors that could materially affect the level and volatility of our net worth.
As of December 31, 2009, the aggregate liquidation preference of the senior preferred stock was $51.7 billion. We paid our
quarterly dividend of $370 million, $1.1 billion, $1.3 billion and $1.3 billion, respectively, on the senior preferred stock in
cash on March 31, 2009, June 30, 2009, September 30, 2009 and December 31, 2009 at the direction of the Conservator.
Subordinated Debt Commitment
In October 2000, we announced our adoption of a series of commitments designed to enhance market discipline,
liquidity and capital. In September 2005, we entered into a written agreement with FHFA that updated those commitments
and set forth a process for implementing them. Under the terms of this agreement, we committed to issue qualifying
subordinated debt for public secondary market trading and rated by no fewer than two nationally recognized statistical rating
organizations in a quantity such that the sum of total capital plus the outstanding balance of qualifying subordinated debt
will equal or exceed the sum of 0.45% of our PCs and Structured Securities outstanding and 4% of our on-balance sheet
assets at the end of each quarter. Qualifying subordinated debt is defined as subordinated debt that contains a deferral of
interest payments for up to five years if: (i) our core capital falls below 125% of our critical capital requirement; or (ii) our
core capital falls below our minimum capital requirement and pursuant to our request, the Secretary of the Treasury
exercises discretionary authority to purchase our obligations under Section 306(c) of our charter. Qualifying subordinated
debt will be discounted for the purposes of this commitment as it approaches maturity with one-fifth of the outstanding
amount excluded each year during the instrument’s last five years before maturity. When the remaining maturity is less than
one year, the instrument is entirely excluded. FHFA, as Conservator of Freddie Mac, has suspended the requirements in the
September 2005 agreement with respect to issuance, maintenance and reporting and disclosure of Freddie Mac subordinated
debt during the term of conservatorship and thereafter until directed otherwise.
Regulatory Capital Monitoring Framework
In a letter dated January 28, 2004, FHFA created a framework for monitoring our capital. The letter directed that we
maintain a 30% mandatory target capital surplus over our minimum capital requirement, subject to certain conditions and
variations; that we submit weekly reports concerning our capital levels; and that we obtain prior approval of certain capital
transactions. The mandatory target capital surplus was subsequently reduced to 20%.
FHFA, as Conservator of Freddie Mac, has announced that the mandatory target capital surplus will not be binding
during the term of conservatorship.
NOTE 12: STOCK-BASED COMPENSATION
Following the implementation of the conservatorship in September 2008, we suspended the operation of our ESPP, and
are no longer making grants under our 2004 Stock Compensation Plan, or 2004 Employee Plan, or our 1995 Directors’ Stock
Compensation Plan, as amended and restated, or Directors’ Plan. Under the Purchase Agreement, we cannot issue any new
options, rights to purchase, participations or other equity interests without Treasury’s prior approval. However, grants
outstanding as of the date of the Purchase Agreement remain in effect in accordance with their terms. Prior to the
implementation of the conservatorship, we made grants under three stock-based compensation plans: (a) the ESPP; (b) the
2004 Employee Plan; and (c) the Directors’ Plan. Prior to the stockholder approval of the 2004 Employee Plan, employee
269 Freddie Mac