Freddie Mac 2009 Annual Report Download - page 28

mortgage assets we are permitted to own as of December 31 of the immediately preceding calendar year, provided that we
are not required to own less than $250 billion in mortgage assets. Under the Purchase Agreement, we also may not incur
indebtedness that would result in the par value of our aggregate indebtedness exceeding 120% of the amount of mortgage
assets we are permitted to own on December 31 of the immediately preceding calendar year. The mortgage asset and
indebtedness limitations will be determined without giving effect to any change in the accounting standards related to
transfers of financial assets and consolidation of VIEs or any similar accounting standard. Therefore, these limitations will
not be affected by our implementation of the changes to the accounting standards for transfers of financial assets and
consolidation of VIEs, under which we were required to consolidate our single-family PC trusts and certain of our Structured
Transactions in our financial statements as of January 1, 2010.
In addition, the Purchase Agreement provides that we may not enter into any new compensation arrangements or
increase amounts or benefits payable under existing compensation arrangements of any named executive officer or other
executive officer (as such terms are defined by SEC rules) without the consent of the Director of FHFA, in consultation with
the Secretary of the Treasury.
We are required under the Purchase Agreement to provide annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K to Treasury in accordance with the time periods specified in the SEC’s rules. In
addition, our designated representative (which, during the conservatorship, is the Conservator) is required to provide quarterly
certifications to Treasury concerning compliance with the covenants contained in the Purchase Agreement and the accuracy
of the representations made pursuant to the agreement. We also are obligated to provide prompt notice to Treasury of the
occurrence of specified events, such as the filing of a lawsuit that would reasonably be expected to have a material adverse
effect. As of February 23, 2010, we believe we were in compliance with the covenants under the Purchase Agreement.
Warrant Covenants
The warrant we issued to Treasury includes, among others, the following covenants: (a) our SEC filings under the
Exchange Act will comply in all material respects as to form with the Exchange Act and the rules and regulations
thereunder; (b) we may not permit any of our significant subsidiaries to issue capital stock or equity securities, or securities
convertible into or exchangeable for such securities, or any stock appreciation rights or other profit participation rights;
(c) we may not take any action that will result in an increase in the par value of our common stock; (d) we may not take any
action to avoid the observance or performance of the terms of the warrant and we must take all actions necessary or
appropriate to protect Treasury’s rights against impairment or dilution; and (e) we must provide Treasury with prior notice of
specified actions relating to our common stock, such as setting a record date for a dividend payment, granting subscription or
purchase rights, authorizing a recapitalization, reclassification, merger or similar transaction, commencing a liquidation of the
company or any other action that would trigger an adjustment in the exercise price or number or amount of shares subject to
the warrant.
As of February 23, 2010, we believe we were in compliance with the covenants under the warrant.
Effect of Conservatorship and Treasury Agreements on Existing Stockholders
The conservatorship, the Purchase Agreement and the senior preferred stock and warrant issued to Treasury have
materially limited the rights of our common and preferred stockholders (other than Treasury as holder of the senior preferred
stock) and had the following adverse effects on our common and preferred stockholders:
• the powers of the stockholders are suspended during the conservatorship. Accordingly, our common stockholders do
not have the ability to elect directors or to vote on other matters during the conservatorship unless the Conservator
delegates this authority to them;
• because we are in conservatorship, we are no longer managed with a strategy to maximize common stockholder
returns. In a letter to the Chairmen and Ranking Members of the Congressional Banking and Financial Services
Committees dated February 2, 2010, the Acting Director of FHFA stated that the focus of the conservatorship is on
conserving assets, minimizing corporate losses, ensuring the Enterprises continue to serve their mission, overseeing
remediation of identified weaknesses in corporate operations and risk management, and ensuring that sound corporate
governance principles are followed;
• the senior preferred stock ranks senior to the common stock and all other series of preferred stock as to both
dividends and distributions upon dissolution, liquidation or winding up of the company;
• the Purchase Agreement prohibits the payment of dividends on common or preferred stock (other than the senior
preferred stock) without the prior written consent of Treasury; and
• the warrant provides Treasury with the right to purchase shares of our common stock equal to up to 79.9% of the total
number of shares of our common stock outstanding on a fully diluted basis on the date of exercise for a nominal
price, thereby substantially diluting the ownership in Freddie Mac of our common stockholders at the time of
25 Freddie Mac