Freddie Mac 2010 Annual Report Download - page 240

December 31, 2010. See “NOTE 3: CONSERVATORSHIP AND RELATED MATTERS — Government Support for our
Business” for additional information regarding the draw request that FHFA, as Conservator, will submit on our behalf to
Treasury to address our deficit in net worth. The aggregate liquidation preference on the senior preferred stock owned by
Treasury was $64.2 billion and $51.7 billion as of December 31, 2010 and December 31, 2009, respectively. See “NOTE 18:
REGULATORY CAPITAL” for additional information.
Issuance of Common Stock Warrant
Pursuant to the Purchase Agreement described in “NOTE 3: CONSERVATORSHIP AND RELATED MATTERS,” on
September 7, 2008, we, through FHFA, in its capacity as Conservator, issued a warrant to purchase common stock to
Treasury. The warrant was issued to Treasury in partial consideration of Treasury’s commitment to provide funds to us under
the terms set forth in the Purchase Agreement.
The warrant gives Treasury the right to purchase shares of our common stock equal to 79.9% of the total number of
shares of our common stock outstanding on a fully diluted basis on the date of exercise. The warrant may be exercised in
whole or in part at any time on or before September 7, 2028, by delivery to us of: (a) a notice of exercise; (b) payment of
the exercise price of $0.00001 per share; and (c) the warrant. If the market price of one share of our common stock is greater
than the exercise price, then, instead of paying the exercise price, Treasury may elect to receive shares equal to the value of
the warrant (or portion thereof being canceled) pursuant to the formula specified in the warrant. Upon exercise of the
warrant, Treasury may assign the right to receive the shares of common stock issuable upon exercise to any other person.
We account for the warrant in permanent equity. At issuance on September 7, 2008, we recognized the warrant at fair
value, and we do not recognize subsequent changes in fair value while the warrant remains classified in equity. We recorded
an aggregate fair value of $2.3 billion for the warrant as a component of additional paid-in-capital. We derived the fair value
of the warrant using a modified Black-Scholes model. If the warrant is exercised, the stated value of the common stock
issued will be reclassified to common stock in our consolidated balance sheets. The warrant was determined to be in-
substance non-voting common stock, because the warrant’s exercise price of $0.00001 per share is considered non-
substantive (compared to the market price of our common stock). As a result, the warrant is included in the computation of
basic and diluted earnings (loss) per share. The weighted average shares of common stock outstanding for the years ended
December 31, 2010, 2009, and 2008, respectively, included shares of common stock that would be issuable upon full
exercise of the warrant issued to Treasury.
Preferred Stock
Table 13.2 provides a summary of our preferred stock outstanding at December 31, 2010. We have the option to redeem
our preferred stock on specified dates, at their redemption price plus dividends accrued through the redemption date.
However, without the consent of Treasury, we are restricted from making payments to purchase or redeem preferred stock as
well as paying any preferred dividends, other than dividends on the senior preferred stock. In addition, all 24 classes of
preferred stock are perpetual and non-cumulative, and carry no significant voting rights or rights to purchase additional
Freddie Mac stock or securities. Costs incurred in connection with the issuance of preferred stock are charged to additional
paid-in capital.
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