Freddie Mac 2009 Annual Report Download - page 40

The conservatorship and investment by Treasury has had, and will continue to have, a material adverse effect on our
common and preferred stockholders.
Prior to our entry into conservatorship, the market price for our common stock declined substantially. After our entry
into conservatorship, the market price of our common stock continued to decline (to less than $1 per share for an extended
period) and the investments of our common and preferred stockholders have lost substantial value, which they may never
recover. There is significant uncertainty as to what changes may occur to our business structure during or following our
conservatorship, including whether we will continue to exist. Therefore, it is likely that our shares could further diminish in
value, or cease to have any value.
The conservatorship and investment by Treasury has had, and will continue to have, other material adverse effects on
our common and preferred stockholders, including the following:
Dividends have been eliminated. The Conservator has eliminated dividends on Freddie Mac common and preferred
stock (other than dividends on the senior preferred stock) during the conservatorship. In addition, under the terms of the
Purchase Agreement, dividends may not be paid to common or preferred stockholders (other than on the senior preferred
stock) without the consent of Treasury, regardless of whether or not we are in conservatorship.
Warrant may substantially dilute investment of current stockholders. If Treasury exercises its warrant to purchase
shares of our common stock equal to 79.9% of the total number of shares of our common stock outstanding on a fully
diluted basis, the ownership interest in the company of our then existing common stockholders will be substantially diluted.
It is possible that stockholders, other than Treasury, will not own more than 20.1% of our total common stock for the
duration of our existence.
No longer managed to maximize stockholder returns. Because we are in conservatorship, we are no longer managed
with a strategy to maximize stockholder returns.
No voting rights during conservatorship. The rights and powers of our stockholders are suspended during the
conservatorship. During the conservatorship, our common stockholders do not have the ability to elect directors or to vote on
other matters unless the Conservator delegates this authority to them.
Competitive and Market Risks
The future growth of our mortgage-related investments portfolio is significantly limited under the Purchase Agreement
and by FHFA regulation, which will result in greater reliance on our guarantee activities to generate revenue.
Under the Purchase Agreement and FHFA regulation, the unpaid principal balance of our mortgage-related investments
portfolio could not exceed $900 billion as of December 31, 2009, and must decline by 10% per year thereafter until it
reaches $250 billion. Due to this restriction, the unpaid principal balance of our mortgage-related investments portfolio may
not exceed $810 billion as of December 31, 2010. In addition, under the Purchase Agreement, without the prior consent of
Treasury, we may not increase our total indebtedness above a specified limit or become liable for any subordinated
indebtedness. Treasury has stated it does not expect us to be an active buyer to increase the size of our mortgage-related
investments portfolio, but also does not expect that active selling will be necessary to meet the required portfolio reduction
targets. In addition, FHFA has stated that, given the size of our current mortgage-related investments portfolio and the
potential volume of delinquent mortgages to be purchased out of PC pools, it expects that any net additions to our mortgage-
related investments portfolio would be related to that activity. Therefore, our ability to take advantage of opportunities to
purchase mortgage assets at attractive prices may be limited. In addition, notwithstanding the expectations expressed by
Treasury and FHFA regarding future selling activity, we can provide no assurance that the cap on our mortgage-related
investments portfolio will not, over time, force us to sell mortgage assets at unattractive prices, particularly given the
potential in coming periods for significant increases in loan modifications and purchases of delinquent loans, both of which
result in the purchase of mortgage loans from our PCs for our mortgage-related investments portfolio.
These limitations will reduce the earnings capacity of our mortgage-related investments portfolio business and require us
to place greater emphasis on our guarantee activities to generate revenue. However, under conservatorship, our ability to
generate revenue through guarantee activities may be limited, as we may be required to adopt business practices that provide
support for the mortgage market in a manner that serves our public mission and other non-financial objectives, but that may
negatively impact our financial results. For example, as a result of the conservatorship and the current economic
environment, we currently seek to issue guarantees with fee terms that are intended to cover our expected credit costs on new
purchases and that cover a portion of our ongoing operating expenses. Specifically, our ability to increase our fees to offset
higher than expected credit costs on guarantees issued before 2009 is limited while we operate at the direction of our
Conservator, and we currently expect that our fees will not cover such credit costs. The combination of the restrictions on
our business activities under the Purchase Agreement and under FHFA regulation, combined with our potential inability to
generate sufficient revenue through our guarantee activities to offset the effects of those restrictions, may have an adverse
effect on our results of operations and financial condition.
37 Freddie Mac