Freddie Mac 2010 Annual Report Download - page 32

• sell or issue any Freddie Mac equity securities (other than the senior preferred stock, the warrant and the common
stock issuable upon exercise of the warrant and other than as required by the terms of any binding agreement in effect
on the date of the Purchase Agreement);
• terminate the conservatorship (other than in connection with a receivership);
• sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value: (a) to a limited
life regulated entity (in the context of a receivership); (b) of assets and properties in the ordinary course of business,
consistent with past practice; (c) in connection with our liquidation by a receiver; (d) of cash or cash equivalents for
cash or cash equivalents; or (e) to the extent necessary to comply with the covenant described below relating to the
reduction of our mortgage-related investments portfolio;
• issue any subordinated debt;
• enter into a corporate reorganization, recapitalization, merger, acquisition or similar event; or
• engage in transactions with affiliates unless the transaction is: (a) pursuant to the Purchase Agreement, the senior
preferred stock or the warrant; (b) upon arm’s length terms; or (c) a transaction undertaken in the ordinary course or
pursuant to a contractual obligation or customary employment arrangement in existence on the date of the Purchase
Agreement.
These covenants also apply to our subsidiaries.
The Purchase Agreement also provides that we may not own mortgage assets with UPB in excess of: (a) $900 billion on
December 31, 2009; or (b) on December 31 of each year thereafter, 90% of the aggregate amount of mortgage assets we are
permitted to own as of December 31 of the immediately preceding calendar year, provided that we are not required to own
less than $250 billion in mortgage assets. Under the Purchase Agreement, we also may not incur indebtedness that would
result in the par value of our aggregate indebtedness exceeding 120% of the amount of mortgage assets we are permitted to
own on December 31 of the immediately preceding calendar year. The mortgage asset and indebtedness limitations are
determined without giving effect to any change in the accounting standards related to transfers of financial assets and
consolidation of VIEs or any similar accounting standard. Therefore, these limitations were not affected by our
implementation of the changes to the accounting standards for transfers of financial assets and consolidation of VIEs, under
which we consolidated our single-family PC trusts and certain of our Other Guarantee Transactions in our financial
statements as of January 1, 2010.
In addition, the Purchase Agreement provides that we may not enter into any new compensation arrangements or
increase amounts or benefits payable under existing compensation arrangements of any named executive officer or other
executive officer (as such terms are defined by SEC rules) without the consent of the Director of FHFA, in consultation with
the Secretary of the Treasury.
As of February 24, 2011, we believe we were in compliance with the covenants under the Purchase Agreement.
Warrant Covenants
The warrant we issued to Treasury includes, among others, the following covenants: (a) we may not permit any of our
significant subsidiaries to issue capital stock or equity securities, or securities convertible into or exchangeable for such
securities, or any stock appreciation rights or other profit participation rights; (b) we may not take any action to avoid the
observance or performance of the terms of the warrant and we must take all actions necessary or appropriate to protect
Treasury’s rights against impairment or dilution; and (c) we must provide Treasury with prior notice of specified actions
relating to our common stock, such as setting a record date for a dividend payment, granting subscription or purchase rights,
authorizing a recapitalization, reclassification, merger or similar transaction, commencing a liquidation of the company or
any other action that would trigger an adjustment in the exercise price or number or amount of shares subject to the warrant.
As of February 24, 2011, we believe we were in compliance with the covenants under the warrant.
Effect of Conservatorship and Treasury Agreements on Existing Stockholders
The conservatorship, the Purchase Agreement and the senior preferred stock and warrant issued to Treasury have
materially limited the rights of our common and preferred stockholders (other than Treasury as holder of the senior preferred
stock) and had the following adverse effects on our common and preferred stockholders:
• the rights and powers of the stockholders are suspended during the conservatorship, and our common stockholders do
not have the ability to elect directors or to vote on other matters;
• because we are in conservatorship, we are no longer managed with a strategy to maximize stockholder returns. In a
letter to the Chairmen and Ranking Members of the Congressional Banking and Financial Services Committees dated
February 2, 2010, the Acting Director of FHFA stated that the focus of the conservatorship is on conserving assets,
minimizing corporate losses, ensuring Freddie Mac and Fannie Mae continue to serve their mission, overseeing
29 Freddie Mac