Freddie Mac 2009 Annual Report Download - page 51

common stock or NYSE-listed preferred stock would require any trading in these securities to occur in the over-the-counter
market and could adversely affect the market prices and liquidity of these securities. The closing price of our common stock
on February 19, 2010 was $1.23 per share.
Ineffective internal control over financial reporting and disclosure controls could result in errors and inadequate
disclosures, affect operating results and cause investors to lose confidence in our reported results.
We face continuing challenges because of deficiencies in our controls and the operational and financial accounting
complexities of our business. Control deficiencies could result in errors, affect operating results and cause investors to lose
confidence in our reported results. For information about the material weaknesses that we remediated during the quarter and
our remaining material weakness, see “CONTROLS AND PROCEDURES — Changes to Internal Control Over Financial
Reporting During the Quarter Ended December 31, 2009.”
There are a number of factors that may impede our efforts to establish and maintain effective disclosure controls and
internal control over financial reporting, including: the nature of the conservatorship and our relationship with FHFA; the
complexity of, and significant changes in, our business activities and related GAAP requirements; significant turnover in our
senior management in 2009; uncertainty regarding the sustainability of newly established controls; and the uncertain impacts
of the ongoing housing and credit market volatility on the reliability of our models used to develop our accounting estimates.
We cannot be certain that our efforts to improve and maintain our internal control over financial reporting will ultimately be
successful.
Effectively designed and operated internal control over financial reporting provides only reasonable assurance that
material errors in our financial statements will be prevented or detected on a timely basis. A failure to establish and maintain
effective internal control over financial reporting increases the risk of a material error in our reported financial results and
delay in our financial reporting timeline. Depending on the nature of a control failure and any required remediation,
ineffective controls could have a material adverse effect on our business.
Delays in meeting our financial reporting obligations could affect our ability to maintain the listing of our securities on
the NYSE. Ineffective controls could also cause investors to lose confidence in our reported financial information, which
may have an adverse effect on the trading price of our securities.
Recent market conditions have added to the uncertainty about the results of the internal models that we use for financial
accounting and reporting purposes, to make business decisions and to manage risks, and our business could be adversely
affected if those models fail to produce reliable results.
The severe deterioration of the housing and credit markets has created additional risk associated with our model results.
Our models may not perform as well in situations for which there are few or no recent historical precedents. The increased
risk that models will not produce reliable results creates additional risk regarding the reliability of our financial statements
and our ability to manage risks. We have adjusted our models in response to recent events, but the added uncertainty about
model results remains.
We make significant use of business and financial models for financial accounting and reporting purposes and to
manage risk. For example, we use models in determining the fair value of financial instruments for which independent price
quotes are not available or reliable, or in extrapolating third-party values to certain of our assets and liabilities. We also use
models to measure and monitor our exposure to interest rate and other market risks and credit risk. The information provided
by these models is also used in making business decisions relating to strategies, initiatives, transactions and products.
Models are inherently imperfect predictors of actual results because they are based on assumptions and/or historical
experience. Our models could produce less reliable results for a number of reasons, including the use of faulty assumptions,
the need for frequent adjustments to respond to rapid changes in economic conditions, the application of models to events or
products outside the model’s intended use, and errors, such as incorrect coding or the use of incorrect data. The complexity
of our models creates additional risk regarding the reliability of model output.
We use market-based information as inputs to our models. However, there is generally a lag between the availability of
this market information and the preparation of our financial statements. When market conditions change quickly and in
unforeseen ways, there is an increased risk that the inputs reflected in our models are not representative of current market
conditions.
Management may need to exercise judgment to interpret or adjust modeled results to take into account new information
or changes in conditions. The dramatic changes in the housing and credit capital markets have required frequent adjustments
to our models and the application of greater management judgment in the interpretation and adjustment of the results
produced by our models. We may also need to adjust our models and apply greater management judgment to account for the
impact of actions we may take to assist the mortgage market, such as the MHA Program. This further increases the risk that
the process may produce less reliable information, particularly since many of these events and actions are unprecedented.
48 Freddie Mac