Freddie Mac 2009 Annual Report Download - page 318

Insurance Corp., Assured Guaranty Municipal Corp. (or AGMC), and National Public Finance Guarantee Corp. or (NPFCG),
each accounted for more than 10% of our overall bond insurance coverage and collectively represented approximately 99%
of our total coverage. All of our top five bond insurers have had their credit rating downgraded by at least one major rating
agency during 2009 and all of our bond insurers, except for AGMC which is rated AA–, are rated BBB+ or below, based on
the lower of the S&P or Moody’s rating scales and stated in terms of the S&P equivalent.
On November 24, 2009, the New York State Insurance Department ordered FGIC to restructure in order to improve its
financial condition and to suspend paying any and all claims effective immediately. In April 2009, SGI, a bond insurer for
which we had $1.1 billion of exposure to unpaid principal balances on our investments in securities, announced that under an
order from the New York State Insurance Department, it suspended payment of all claims in order to complete a
comprehensive restructuring of its business. Consequently, S&P assigned an “R” rating, reflecting that the company is under
regulatory supervision. During the second quarter of 2009, as part of its comprehensive restructuring, SGI pursued a
settlement with certain policyholders. In July 2009, we agreed to terminate our rights under certain policies with SGI, which
provided credit coverage for certain of the bonds owned by us, in exchange for a one-time cash payment of $113 million.
We believe that some of our bond insurers lack sufficient ability to fully meet all of their expected lifetime claims-paying
obligations to us as they emerge.
We evaluate the recovery from primary monoline bond insurance policies as part of our impairment analysis for our
investments in securities. If a monoline bond insurer fails to meet its obligations on our investments in securities, then the
fair values of our securities would further decline, which could have a material adverse effect on our results and financial
condition. We recognized other-than-temporary impairment losses during 2008 and 2009 related to investments in mortgage-
related securities covered by bond insurance as a result of our uncertainty over whether or not certain insurers will meet our
future claims in the event of a loss on the securities. See “NOTE 6: INVESTMENTS IN SECURITIES” for further
information on our evaluation of impairment on securities covered by bond insurance.
Securitization Trusts
Effective December 2007 we established securitization trusts for the administration of cash remittances received on the
underlying assets of our PCs and Structured Securities. We receive trust management income, which represents the fees we
earn as master servicer, issuer, trustee and administrator for our PCs and Structured Securities. These fees, which are
included in our non-interest income, are derived from interest earned on principal and interest cash flows held in the trust
between the time funds are remitted to the trust by servicers and the date of distribution to our PC and Structured Securities
holders. The trust management income is offset by interest expense we incur when a borrower prepays a mortgage, but the
full amount of interest for the month is due to the PC investor. We recognized trust management income (expense) of
$(761) million, $(70) million and $18 million during 2009, 2008 and 2007, respectively, on our consolidated statements of
operations.
We have off-balance sheet exposure to the trust of the same maximum amount that applies to our credit risk of our
outstanding guarantees; however, we also have exposure to the trust and its institutional counterparties for any investment
losses that are incurred in our role as the securities administrator for the trust. In accordance with the trust agreements, we
invest the funds of the trusts in eligible short-term financial instruments that are mainly the highest-rated debt types as
classified by a nationally-recognized statistical rating organization. To the extent there is a loss related to an eligible
investment for the trust, we, as the administrator are responsible for making up that shortfall. As of December 31, 2009 and
2008, there were $22.5 billion and $11.6 billion, respectively, of cash and other non-mortgage assets in this trust. As of
December 31, 2009, these consisted of: (a) $6.8 billion of cash equivalents invested in 7 counterparties that had short-term
credit ratings of A-1+ on the S&P’s or equivalent scale, (b) $8.2 billion of cash deposited with the Federal Reserve Bank,
and (c) $7.5 billion of securities sold under agreements to resell with one counterparty, which had a short-term S&P rating
of A-1. During 2008, we recognized $1.1 billion of losses on investment activity associated with our role as securities
administrator for this trust on unsecured loans made to Lehman on the trust’s behalf. These short-term loans were due to
mature on September 15, 2008, the date Lehman filed for bankruptcy; however, Lehman failed to repay these loans and the
accrued interest. See “NOTE 14: LEGAL CONTINGENCIES” for further information on this claim.
Derivative Portfolio
On an ongoing basis, we review the credit fundamentals of all of our derivative counterparties to confirm that they
continue to meet our internal standards. We assign internal ratings, credit capital and exposure limits to each counterparty
based on quantitative and qualitative analysis, which we update and monitor on a regular basis. We conduct additional
reviews when market conditions dictate or events affecting an individual counterparty occur.
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