Freddie Mac 2010 Annual Report Download - page 259

undercapitalized.” If we fail to meet the critical capital standard, we must be classified as “critically undercapitalized.” In
addition, FHFA has discretion to reduce our capital classification by one level if FHFA determines in writing that: (a) we are
engaged in conduct that could result in a rapid depletion of core or total capital, the value of collateral pledged as security
has decreased significantly, or the value of the property subject to mortgages held or securitized by us has decreased
significantly; (b) we are in an unsafe or unsound condition; or (c) we are engaging in unsafe or unsound practices.
If we were classified as adequately capitalized, we generally could pay a dividend on our common or preferred stock or
make other capital distributions (which includes common stock repurchases and preferred stock redemptions) without prior
FHFA approval so long as the payment would not decrease total capital to an amount less than our risk-based capital
requirement and would not decrease our core capital to an amount less than our minimum capital requirement. However,
during conservatorship, the Conservator has instructed our Board of Directors that it should consult with and obtain the
approval of the Conservator before taking any actions involving capital stock and dividends. In addition, while the senior
preferred stock is outstanding, we are prohibited from paying dividends (other than on the senior preferred stock) or issuing
equity securities without Treasury’s consent.
If we were classified as undercapitalized, we would be prohibited from making a capital distribution that would reduce
our core capital to an amount less than our minimum capital requirement. We also would be required to submit a capital
restoration plan for FHFA approval, which could adversely affect our ability to make capital distributions.
If we were classified as significantly undercapitalized, we would be prohibited from making any capital distribution that
would reduce our core capital to less than the critical capital level. We would otherwise be able to make a capital distribution
only if FHFA determined that the distribution would: (a) enhance our ability to meet the risk-based capital standard and the
minimum capital standard promptly; (b) contribute to our long-term financial safety and soundness; or (c) otherwise be in the
public interest. Also under this classification, FHFA could take action to limit our growth, require us to acquire new capital
or restrict us from activities that create excessive risk. We also would be required to submit a capital restoration plan for
FHFA approval, which could adversely affect our ability to make capital distributions.
If we were classified as critically undercapitalized, FHFA would have the authority to appoint a conservator or receiver
for us.
In addition, without regard for our capital classification, under the GSE Act, we are not permitted to make a capital
distribution if, after making the distribution, we would be undercapitalized, except the Director of FHFA may permit us to
repurchase shares if the repurchase is made in connection with the issuance of additional shares or obligations in at least an
equivalent amount and will reduce our financial obligations or otherwise improve our financial condition. Also without
regard to our capital classification, under Freddie Mac’s charter, we must obtain prior written approval of FHFA to make any
capital distribution that would decrease total capital to an amount less than the risk-based capital level or that would decrease
core capital to an amount less than the minimum capital level.
Performance Against Regulatory Capital Standards
Table 18.1 summarizes our minimum capital requirements and deficits and net worth.
Table 18.1 — Net Worth and Minimum Capital
December 31, 2010 December 31, 2009
(in millions)
GAAP net worth
(1)
............................................................. $ (401) $ 4,372
Core capital (deficit)
(2)(3)
........................................................ $(52,570) $(23,774)
Less: Minimum capital requirement
(2)
................................................ 25,987 28,352
Minimum capital surplus (deficit)
(2)
............................................... $(78,557) $(52,126)
(1) Net worth (deficit) represents the difference between our assets and liabilities under GAAP.
(2) Core capital and minimum capital figures for December 31, 2010 are estimates. FHFA is the authoritative source for our regulatory capital.
(3) Core capital excludes certain components of GAAP total equity (deficit) (i.e., AOCI, liquidation preference of the senior preferred stock and non-
controlling interests) as these items do not meet the statutory definition of core capital.
Following our entry into conservatorship, we have focused 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. 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.
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. FHFA notified us that the measurement period for any mandatory
receivership determination with respect to our assets and obligations would commence no earlier than the SEC public filing
deadline for our quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA
256 Freddie Mac