Freddie Mac 2010 Annual Report Download - page 155

Our cash and cash equivalents increased $36.8 billion to $45.3 billion during 2008. Cash flows used for operating
activities during 2008 were $10.1 billion, which primarily reflected a reduction in cash as a result of a net increase in
held-for-sale mortgage loans. Cash flows used for investing activities during 2008 were $71.4 billion, primarily resulting
from purchases of trading securities and available-for-sale securities, partially offset by proceeds from maturities of available-
for-sale securities and sales of trading securities. Cash flows provided by financing activities in 2008 were $118.3 billion,
largely attributable to proceeds from the issuance of debt securities, net of repayments.
Capital Resources
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our
management of capital. On October 9, 2008, FHFA announced that it was suspending capital classification of us during
conservatorship in light of the Purchase Agreement. FHFA continues to monitor our capital levels, but the existing statutory
and FHFA-directed regulatory capital requirements are not binding during conservatorship. We continue to provide
submissions to FHFA on both minimum and risk-based capital. See “NOTE 18: REGULATORY CAPITAL” for our
minimum capital requirement, core capital, and GAAP net worth results as of December 31, 2010.
Under the Purchase Agreement, Treasury made a commitment to provide us with funding, under certain conditions, to
eliminate deficits in our net worth. The Purchase Agreement provides that, if FHFA determines as of quarter end that our
liabilities have exceeded our assets under GAAP, Treasury will contribute funds to us in an amount equal to the difference
between such liabilities and assets; a higher amount may be drawn if Treasury and Freddie Mac mutually agree that the draw
should be increased beyond the level by which liabilities exceed assets under GAAP. In each case, the amount of the draw
cannot exceed the maximum aggregate amount that may be funded under the Purchase Agreement.
We are focusing our risk and capital management, consistent with the objectives of conservatorship, on, among other
things, maintaining a positive balance of GAAP equity in order to reduce the likelihood that we will need to make additional
draws on the Purchase Agreement with Treasury, while returning to long-term profitability. Our business objectives and
strategies have in some cases been altered since we were placed into conservatorship, and may continue to change. Certain
changes to our business objectives and strategies are designed to provide support for the mortgage market in a manner that
serves public policy and other non-financial objectives. In this regard, we are focused on serving our mission, helping
families keep their homes, and stabilizing the economy by playing a vital role in the Obama Administration’s housing
programs. However, these changes to our business objectives and strategies may conflict with maintaining positive GAAP
equity. In addition, notwithstanding our failure to maintain required capital levels, FHFA directed us to continue to make
interest and principal payments on our subordinated debt. For more information, see “BUSINESS — Regulation and
Supervision — Federal Housing Finance Agency — Subordinated Debt.”
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are and have
been less than our obligations for a period of 60 days. Obtaining funding from Treasury pursuant to its commitment under
the Purchase Agreement enables us to avoid being placed into receivership by FHFA. At December 31, 2010, our liabilities
exceeded our assets under GAAP by $401 million. Accordingly, we must obtain funding from Treasury pursuant to its
commitment under the Purchase Agreement in order to avoid being placed into receivership by FHFA. FHFA, as
Conservator, will submit a draw request to Treasury under the Purchase Agreement in the amount of $500 million, which we
expect to receive by March 31, 2011. See “BUSINESS — Regulation and Supervision — Federal Housing Finance
Agency — Receivership” for additional information on mandatory receivership.
We expect to make additional draws under the Purchase Agreement in future periods. The size and timing of such draws
will be determined by a variety of factors that could adversely affect our net worth, including our dividend obligation on the
senior preferred stock; how long and to what extent the housing market, including home prices, remains weak, which could
increase credit expenses and cause additional other-than-temporary impairments of the non-agency mortgage-related
securities we hold; foreclosure prevention efforts and foreclosure processing delays, which could increase our expenses;
adverse changes in interest rates, the yield curve, implied volatility or mortgage-to-debt OAS, which could increase realized
and unrealized mark-to-fair-value losses recorded in earnings or AOCI; required reductions in the size of our mortgage-
related investments portfolio and other limitations on our investment activities that reduce the earnings capacity of our
investment activities; quarterly commitment fees payable to Treasury; our inability to access the public debt markets on
terms sufficient for our needs, absent continued support from Treasury; establishment of additional valuation allowances for
our remaining net deferred tax asset; changes in accounting practices or standards; the effect of the MHA Program and other
government initiatives; limitations on our ability to develop new products; the introduction of additional public mission-
related initiatives that may adversely impact our financial results; or changes in business practices resulting from legislative
and regulatory developments.
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