Freddie Mac 2009 Annual Report Download - page 61

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
EXECUTIVE SUMMARY
You should read this MD&A in conjunction with our consolidated financial statements and related notes for the year
ended December 31, 2009.
For 2009, net loss attributed to Freddie Mac was $21.6 billion, as compared to $50.1 billion for 2008. Our financial
results for the year ended December 31, 2009 were affected by the adverse conditions in the U.S. mortgage markets, which
deteriorated dramatically during the second half of 2008 and remained weak throughout 2009. Weak housing market
conditions, including lack of home price appreciation in most states, higher mortgage delinquency rates and higher loss
severities, contributed to large credit-related expenses during 2009. Except for the first quarter of 2009, we maintained
positive net worth for the year. We received cash proceeds from two draws under Treasury’s funding commitment during
2009, including $6.1 billion relating to our net worth deficit for the first quarter of 2009, which resulted in an aggregate
liquidation preference of $51.7 billion on Treasury’s senior preferred stock at December 31, 2009. This and previous draws
resulted in a large dividend obligation on our senior preferred stock. We expect to make additional draws on Treasury’s
funding commitment in the future. The size of such draws will be determined by a variety of factors, including whether
conditions in the housing market continue to remain weak or deteriorate further, and the implementation of changes in
accounting standards.
Due to the implementation of changes to the accounting standards for transfers of financial assets and consolidation of
VIEs, we recognized a significant decline in our total equity (deficit) on January 1, 2010, which will increase the likelihood
that we will require a draw from Treasury under the Purchase Agreement for the first quarter of 2010. The cumulative effect
of these changes in accounting principles as of January 1, 2010 is a net decrease of approximately $11.7 billion to total
equity (deficit), which includes the changes to the opening balances of AOCI and retained earnings (accumulated deficit).
For more information, see “2010 Significant Changes in Accounting Standards — Accounting for Transfers of Financial
Assets and Consolidation of VIEs.”
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited
and we may not be able to do so for the foreseeable future, if at all. The amounts we are obligated to pay in dividends on
the senior preferred stock are substantial and will have an adverse impact on our financial position and net worth and could
substantially delay our return to long-term profitability or make long-term profitability unlikely.
Business Objectives
We continue to operate under the conservatorship that commenced on September 6, 2008, conducting our business under
the direction of FHFA as our Conservator. While the conservatorship has benefited us through, for example, improved access
to the debt markets because of the support we receive from Treasury and the Federal Reserve, we are also subject to certain
constraints on our business activities by Treasury due to the terms of, and Treasury’s rights under, the Purchase Agreement.
During the conservatorship, the Conservator delegated certain authority to the Board of Directors to oversee, and to
management to conduct, day-to-day operations so that the company can continue to operate in the ordinary course of
business.
Our business objectives and strategies have in some cases been altered since we entered into conservatorship, and may
continue to change. Based on our charter, public statements from Treasury and FHFA officials and guidance from our
Conservator, we have a variety of different, and potentially competing, objectives, including:
• providing liquidity, stability and affordability in the mortgage market;
• continuing to provide additional assistance to the struggling housing and mortgage markets;
• reducing the need to draw funds from Treasury pursuant to the Purchase Agreement;
• returning to long-term profitability; and
• protecting the interests of the taxpayers.
These objectives create conflicts in strategic and day-to-day decision making that will likely lead to suboptimal
outcomes for one or more, or possibly all, of these objectives. We regularly receive direction from our Conservator on how
to pursue our objectives under conservatorship, including direction to focus our efforts on assisting homeowners in the
housing and mortgage markets.
Certain changes to our business objectives and strategies are designed to provide support for the mortgage market in a
manner that serves our public mission and other non-financial objectives, but may not contribute to profitability. Our efforts
to help struggling homeowners and the mortgage market, in line with our mission, may help to mitigate credit losses, but in
some cases may increase our expenses or require us to forego revenue opportunities in the near term. As a result, in some
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