Freddie Mac 2010 Annual Report Download - page 149

LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our business activities require that we maintain adequate liquidity to fund our operations, which may include the need
to make payments of principal and interest on our debt securities, including securities issued by our consolidated trusts; make
payments upon the maturity, redemption or repurchase of our debt securities; make net payments on derivative instruments;
pay dividends on our senior preferred stock; purchase mortgage-related securities and other investments; and purchase
mortgage loans, including modified or seriously delinquent loans from PC pools.
We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:
• receipts of principal and interest payments on securities or mortgage loans we hold;
• other cash flows from operating activities, including the management and guarantee fees we receive in connection
with our guarantee activities;
• borrowings against mortgage-related securities and other investment securities we hold; and
• sales of securities we hold.
We have also received substantial amounts of cash from Treasury pursuant to draws under the Purchase Agreement,
which are made to address deficits in our net worth. We received $12.5 billion in cash from Treasury pursuant to draws
under the Purchase Agreement during 2010.
We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to maintain
our access to the debt markets and to have adequate liquidity to conduct our normal business activities, although the costs of
our debt funding could vary.
We may require cash in order to fulfill our mortgage purchase commitments. Historically, we fulfilled our purchase
commitments related to our mortgage purchase flow business primarily by swap transactions, whereby our customers
exchanged mortgage loans for PCs, rather than through cash outlays. However, it is at the discretion of the seller, subject to
limitations imposed by the contract governing the commitment, whether the purchase commitment is fulfilled through a swap
transaction or with cash. We provide liquidity to our seller/servicers through our cash purchase program. Loans purchased
through the cash purchase program are typically sold to investors through a cash auction of PCs, and, in the interim, are
carried as mortgage loans on our consolidated balance sheets. See “OFF-BALANCE SHEET ARRANGEMENTS” for
additional information regarding our mortgage purchase commitments.
We make extensive use of the Fedwire system in our business activities. The Federal Reserve requires that we fully fund
our account in the Fedwire system to the extent necessary to cover cash payments on our debt and mortgage-related
securities each day, before the Federal Reserve Bank of New York, acting as our fiscal agent, will initiate such payments. We
routinely use an open line of credit with a third party, which provides intraday liquidity to fund our activities through the
Fedwire system. This line of credit is an uncommitted intraday loan facility. As a result, while we expect to continue to use
the facility, we may not be able to draw on it, if and when needed. This line of credit requires that we post collateral that, in
certain circumstances, the secured party has the right to repledge to other third parties, including the Federal Reserve Bank.
As of December 31, 2010, we pledged approximately $10.5 billion of securities to this secured party. See “NOTE 8:
INVESTMENTS IN SECURITIES — Collateral Pledged” for further information.
Depending on market conditions and the mix of derivatives we employ in connection with our ongoing risk
management activities, our derivative portfolio can be either a net source or a net use of cash. For example, depending on the
prevailing interest-rate environment, interest-rate swap agreements could cause us either to make interest payments to
counterparties or to receive interest payments from counterparties. Purchased options require us to pay a premium while
written options allow us to receive a premium.
We are required to pledge collateral to third parties in connection with secured financing and daily trade activities. In
accordance with contracts with certain derivative counterparties, we post collateral to those counterparties for derivatives in a
net loss position, after netting by counterparty, above agreed-upon posting thresholds. See “NOTE 8: INVESTMENTS IN
SECURITIES — Collateral Pledged” for information about assets we pledge as collateral.
We are involved in various legal proceedings, including those discussed in “LEGAL PROCEEDINGS,” which may
result in a use of cash in order to settle claims or pay certain costs.
Liquidity Management
Maintaining sufficient liquidity is of primary importance and we continually strive to enhance our liquidity management
practices and policies. Under these practices and policies, we maintain an amount of cash and cash equivalent reserves in the
form of liquid, high quality short-term investments that is intended to enable us to meet ongoing cash obligations for an
extended period, without access to short- and long-term unsecured debt markets. We also actively manage the concentration
146 Freddie Mac