Freddie Mac 2010 Annual Report Download - page 238

Hedge Designation of Derivatives
At December 31, 2010 and 2009, we did not have any derivatives in hedge accounting relationships; however, there are
deferred net losses recorded in AOCI related to closed cash flow hedges. As shown in Table 12.3, the total AOCI related to
derivatives designated as cash flow hedges was a loss of $2.2 billion and $2.9 billion at December 31, 2010 and 2009,
respectively, composed of deferred net losses on closed cash flow hedges. Closed cash flow hedges involve derivatives that
have been terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market interest rates have
no impact on the deferred portion of AOCI relating to losses on closed cash flow hedges.
The previous deferred amount related to closed cash flow hedges remains in our AOCI balance and will be recognized
into earnings over the expected time period for which the forecasted issuances of debt impact earnings. Over the next
12 months, we estimate that approximately $516 million, net of taxes, of the $2.2 billion of cash flow hedging losses in
AOCI at December 31, 2010 will be reclassified into earnings. The maximum remaining length of time over which we have
hedged the exposure related to the variability in future cash flows on forecasted transactions, primarily forecasted debt
issuances, is 23 years. However, over 70% and 90% of AOCI relating to closed cash flow hedges at December 31, 2010, will
be reclassified to earnings over the next five and ten years, respectively.
During 2008 we designated cash flow hedge accounting relationships for certain commitments to sell mortgage-related
securities; however, we discontinued hedge accounting for these derivative instruments in December 2008. In addition, during
2008, we designated certain derivative positions as cash flow hedges of changes in cash flows associated with our forecasted
issuances of debt, consistent with our risk management goals, in an effort to reduce interest rate risk related volatility in our
consolidated statements of operations. In conjunction with our entry into conservatorship on September 6, 2008, we
determined that we could no longer assert that the associated forecasted issuances of debt were probable of occurring and, as
a result, we ceased designating derivative positions as cash flow hedges associated with forecasted issuances of debt. As a
result of our discontinuance of this hedge accounting strategy, we transferred $27.6 billion in notional amount and
$(488) million in fair value from open cash flow hedges to closed cash flow hedges on September 6, 2008.
Table 12.3 presents the changes in AOCI related to derivatives designated as cash flow hedges. Net reclassifications of
losses to earnings represents the AOCI amount that was recognized in earnings as the originally hedged forecasted
transactions affected earnings, unless it was deemed probable that the forecasted transaction would not occur. If it is probable
that the forecasted transaction will not occur, then the deferred gain or loss associated with the hedge related to the
forecasted transaction would be reclassified into earnings immediately. For further information on our net deferred tax asset
valuation allowance see “NOTE 14: INCOME TAXES.”
Table 12.3 — AOCI Related to Cash Flow Hedge Relationships
2010 2009 2008
Year Ended December 31,
(in millions)
Beginning balance
(1)
................................................................ $(2,905) $(3,678) $(4,059)
Cumulative effect of change in accounting principle
(2)
....................................... (7) — 4
Net change in fair value related to cash flow hedging activities
(3)
................................ — — (522)
Net reclassifications of losses to earnings
(4)
............................................... 673 773 899
Ending balance
(1)
.................................................................. $(2,239) $(2,905) $(3,678)
(1) Represents the effective portion of the fair value of open derivative contracts (i.e., net unrealized gains and losses) and net deferred gains and losses on
closed (i.e., terminated or redesignated) cash flow hedges.
(2) Represent adjustments to initially apply new accounting standards. Net of tax benefit of $4 million and $0 million for years ended December 31, 2010
and 2008, respectively. We adopted: (a) amendments to the accounting standards on transfers of financial assets and consolidation of VIEs, as well as a
change in the amortization method for certain related deferred items during 2010; and (b) the accounting standard on the fair value option for financial
assets and financial liabilities during 2008.
(3) Net of tax benefit of $0 million, $0 million, and $25 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(4) Net of tax benefit of $337 million, $392 million, and $476 million for the years ended December 31, 2010, 2009 and 2008, respectively.
NOTE 13: FREDDIE MAC STOCKHOLDERS’ EQUITY (DEFICIT)
Issuance of Senior Preferred Stock
Pursuant to the Purchase Agreement described in “NOTE 3: CONSERVATORSHIP AND RELATED MATTERS,” we
issued one million shares of senior preferred stock to Treasury on September 8, 2008. The senior preferred stock was issued
to Treasury in partial consideration of Treasury’s commitment to provide funds to us under the Purchase Agreement.
Shares of the senior preferred stock have a par value of $1, and have a stated value and initial liquidation preference
equal to $1,000 per share. The liquidation preference of the senior preferred stock is subject to adjustment. Dividends that
are not paid in cash for any dividend period will accrue and be added to the liquidation preference of the senior preferred
stock. In addition, any amounts Treasury pays to us pursuant to its funding commitment under the Purchase Agreement and
any quarterly commitment fees that are not paid in cash to Treasury nor waived by Treasury will be added to the liquidation
235 Freddie Mac