Freddie Mac 2010 Annual Report Download - page 110

Total Equity (Deficit)
Total equity (deficit) decreased from $4.4 billion at December 31, 2009 to $(401) million at December 31, 2010,
reflecting: (a) a net loss of $14.0 billion for the year ended December 31, 2010; (b) the cumulative effect of changes in
accounting principles of $(11.7) billion due to our adoption of amendments to the accounting standards for transfers of
financial assets and consolidation of VIEs; and (c) payment of senior preferred stock dividends in an aggregate amount of
$5.7 billion. These amounts were partially offset by: (a) a $13.6 billion decrease in unrealized losses in AOCI on our
available-for-sale securities; (b) $12.5 billion received from Treasury during 2010 under the Purchase Agreement; and (c) a
$0.7 billion decrease in unrealized losses in AOCI related to our closed cash flow hedge relationships.
The balance of AOCI at December 31, 2010 was a net loss of approximately $12.0 billion, net of taxes, compared to a
net loss of $23.6 billion, net of taxes, at December 31, 2009. The balance of AOCI was $26.3 billion at January 1, 2010, due
to the impacts of the cumulative effect of changes in accounting principles. Net unrealized losses in AOCI on our available-
for-sale securities decreased by $13.6 billion during 2010 primarily attributable to fair value increases resulting from: (a) the
impact of a decline in interest rates, primarily related to our agency securities; and (b) improved market conditions for our
investments in non-agency mortgage-related securities. Net unrealized losses in AOCI on our closed cash flow hedge
relationships decreased by $0.7 billion during 2010, primarily attributable to the reclassification of losses into earnings
related to our closed cash flow hedges as the originally forecasted transactions affected earnings. See “NOTE 2: CHANGE
IN ACCOUNTING PRINCIPLES” for additional information on the cumulative effect of these changes in accounting
principles.
RISK MANAGEMENT
Our investment and credit guarantee activities expose us to three broad categories of risk: (a) credit risk; (b) interest rate
risk and other market risk; and (c) operational risk. See “RISK FACTORS” for additional information regarding these and
other risks.
Risk management is a critical aspect of our business. We manage risk through a framework whereby our executive
management is responsible for independent risk evaluation. Within this framework, executive management monitors
performance against our risk management strategies and established risk limits and reporting thresholds, identifies and
assesses potential issues and provides oversight regarding changes in business processes and activities.
Credit Risk
We are subject primarily to two types of credit risk: institutional credit risk and mortgage credit risk. Institutional credit
risk is the risk that a counterparty that has entered into a business contract or arrangement with us will fail to meet its
obligations. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage we own or
guarantee. We are exposed to mortgage credit risk on our total mortgage portfolio because we either hold the mortgage
assets or have guaranteed mortgages in connection with the issuance of a Freddie Mac mortgage-related security, or other
guarantee commitment.
Institutional Credit Risk
In recent periods, challenging market conditions adversely affected the liquidity and financial condition of our
counterparties and this may continue in 2011. Despite federal intervention, bank failures remained high in 2010. Our
exposure to mortgage seller/servicers remained high in 2010 with respect to their repurchase obligations arising from
breaches of representations and warranties made to us for loans they underwrote and sold to us. We also rely significantly on
our seller/servicers to perform loan workout activities as well as foreclosures on loans that they service for us. Our credit
losses could increase to the extent that our seller/servicers do not fully perform these obligations in a prudent and timely
manner. Our exposure to derivatives counterparties remains highly concentrated as compared to historical levels.
Our investments in securities expose us to institutional credit risk to the extent that servicers, issuers, guarantors, or
third parties providing credit enhancements become insolvent or do not perform their obligations. Our investments in non-
Freddie Mac mortgage-related securities include both agency and non-agency securities. However, agency securities have
historically presented minimal institutional credit risk due to the guarantee provided by those institutions. See
“CONSOLIDATED BALANCE SHEETS ANALYSIS — Investments in Securities” for additional information on
institutional credit risk associated with our investments in mortgage-related securities, including higher-risk components and
impairment charges we recognized in 2010 and 2009 related to these investments. For information about institutional credit
risk associated with our investments in non-mortgage-related securities, see “CONSOLIDATED BALANCE SHEETS
ANALYSIS — Non-Mortgage-Related Securities” as well as “Cash and Other Investments Counterparties” below.
We are working to enforce our rights as an investor with respect to the non-agency mortgage-related securities we hold,
and are engaged in efforts to potentially mitigate losses on our investments in non-agency mortgage-related securities. Our
Conservator directed us to work with Fannie Mae to enforce investor rights in securitization trusts in which we both have
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