Freddie Mac 2010 Annual Report Download - page 33

remediation of identified weaknesses in corporate operations and risk management, and ensuring that sound corporate
governance principles are followed;
• the senior preferred stock ranks senior to the common stock and all other series of preferred stock as to both
dividends and distributions upon dissolution, liquidation or winding up of the company;
• the Conservator has eliminated dividends on Freddie Mac common and preferred stock (other than dividends on the
senior preferred stock) during conservatorship. In addition, the Purchase Agreement prohibits the payment of
dividends on common or preferred stock (other than the senior preferred stock) without the prior written consent of
Treasury; and
• the warrant provides Treasury with the right to purchase shares of our common stock equal to up to 79.9% of the total
number of shares of our common stock outstanding on a fully diluted basis on the date of exercise for a nominal
price, thereby substantially diluting the ownership in Freddie Mac of our common stockholders at the time of
exercise. Until Treasury exercises its rights under the warrant, or its right to exercise the warrant expires on
September 7, 2028 without having been exercised, the holders of our common stock continue to have the risk that, as
a group, they will own no more than 20.1% of the total voting power of the company. Under our charter, bylaws and
applicable law, 20.1% is insufficient to control the outcome of any vote that is presented to the common stockholders.
Accordingly, existing common stockholders have no assurance that, as a group, they will be able to control the
election of our directors or the outcome of any other vote after the time, if any, that the conservatorship ends.
As described above, the conservatorship and Treasury Agreements also impact our business in ways that indirectly
affect our common and preferred stockholders. By their terms, the Purchase Agreement, senior preferred stock and warrant
will continue to exist even if we are released from the conservatorship. For a description of the risks to our business relating
to the conservatorship and Treasury Agreements, see “RISK FACTORS.”
Regulation and Supervision
In addition to our oversight by FHFA as our Conservator, we are subject to regulation and oversight by FHFA under our
charter and the GSE Act, which was modified substantially by the Reform Act. We are also subject to certain regulation by
other government agencies.
Federal Housing Finance Agency
FHFA is an independent agency of the federal government responsible for oversight of the operations of Freddie Mac,
Fannie Mae and the FHLBs. The Director of FHFA is appointed by the President and confirmed by the Senate for a five-year
term, removable only for cause. In the discussion below, we refer to Freddie Mac and Fannie Mae as the “enterprises.”
The Federal Housing Finance Oversight Board, or the Oversight Board, is responsible for advising the Director of FHFA
with respect to overall strategies and policies. The Oversight Board consists of the Director of FHFA as Chairperson, the
Secretary of the Treasury, the Chair of the SEC and the Secretary of HUD.
Under the GSE Act, FHFA has safety and soundness authority that is comparable to, and in some respects, broader than
that of the federal banking agencies. The GSE Act also provides FHFA with powers that, even if we were not in
conservatorship, include the authority to raise capital levels above statutory minimum levels, regulate the size and content of
our mortgage-related investments portfolio, and approve new mortgage products.
FHFA is responsible for implementing the various provisions of the GSE Act that were added by the Reform Act. In
general, we remain subject to existing regulations, orders and determinations until new ones are issued or made.
Receivership
Under the GSE Act, FHFA must place us into receivership if FHFA determines in writing that our assets are less than
our obligations for a period of 60 days. FHFA has 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 has also advised
us that, if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount
under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership determination.
In addition, we could be put into receivership at the discretion of the Director of FHFA at any time for other reasons,
including conditions that FHFA has already asserted existed at the time the then Director of FHFA placed us into
conservatorship. These include: (a) a substantial dissipation of assets or earnings due to unsafe or unsound practices; (b) the
existence of an unsafe or unsound condition to transact business; (c) an inability to meet our obligations in the ordinary
course of business; (d) a weakening of our condition due to unsafe or unsound practices or conditions; (e) critical
undercapitalization; (f) the likelihood of losses that will deplete substantially all of our capital; or (g) by consent.
30 Freddie Mac