Freddie Mac 2010 Annual Report Download - page 46

position to offer employees financial incentives that are equity-based and, as a result of this and other factors relating to the
conservatorship that may affect our attractiveness as an employer, we may be at a competitive disadvantage compared to
other potential employers. Uncertainty about the future of the GSEs affects all of our operations and heightens the risks
related to retention of management and other valuable employees. A recovering economy is likely to put additional pressures
on turnover in 2011, as other attractive opportunities may become available to people we want to retain. Accordingly, we
may not be able to retain or replace executives or other employees with key skills, and may lose institutional knowledge, that
could adversely affect our ability to conduct our business effectively. We may also face increased operational risk if key
employees leave the company.
The conservatorship and investment by Treasury has had, and will continue to have, a material adverse effect on our
common and preferred stockholders.
Prior to our entry into conservatorship, the market price for our common stock declined substantially. After our entry
into conservatorship, the market price of our common stock continued to decline (to less than $1 per share for an extended
period immediately following our entry into conservatorship, and again following the delisting of our common stock from
the NYSE at the direction of FHFA). As a result, the investments of our common and preferred stockholders lost substantial
value, which they may never recover. There is significant uncertainty as to what changes may occur to our business structure
during or following our conservatorship, including whether we will continue to exist. Therefore, it is likely that our shares
could further diminish in value, or cease to have any value.
The conservatorship and investment by Treasury has had, and will continue to have, other material adverse effects on
our common and preferred stockholders, including the following:
•No voting rights during conservatorship. The rights and powers of our stockholders are suspended during the
conservatorship and our common stockholders do not have the ability to elect directors or to vote on other matters.
•No longer managed to maximize stockholder returns. 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 remediation of identified weaknesses in corporate
operations and risk management, and ensuring that sound corporate governance principles are followed.
•Priority of Senior Preferred Stock. 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.
•Dividends have been eliminated. The Conservator has eliminated dividends on Freddie Mac common and preferred
stock (other than dividends on the senior preferred stock) during the conservatorship. In addition, under the terms of
the Purchase Agreement, dividends may not be paid to common or preferred stockholders (other than on the senior
preferred stock) without the consent of Treasury, regardless of whether or not we are in conservatorship.
•Warrant may substantially dilute investment of current stockholders. If Treasury exercises its warrant 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, the ownership interest in the company of our then existing common stockholders will be substantially
diluted. It is possible that stockholders, other than Treasury, will not own more than 20.1% of our total common stock
for the duration of our existence. 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.
Competitive and Market Risks
Our investment activity is significantly limited under the Purchase Agreement and by FHFA, which will likely reduce our
earnings from investment activities and result in greater reliance on our guarantee activities to generate revenue.
We are subject to significant limitations on our investment activity, which will adversely affect the earnings capacity of
our mortgage-related investments portfolio. These limitations include: (a) a requirement to reduce the size of our mortgage-
related investments portfolio; and (b) significant constraints on our ability to purchase or sell mortgage assets.
Under the terms of the Purchase Agreement and FHFA regulation, our mortgage-related investments portfolio is subject
to a cap that decreases by 10% each year until the portfolio reaches $250 billion. As a result, the UPB of our mortgage-
related investments portfolio could not exceed $810 billion as of December 31, 2010 and may not exceed $729 billion as of
December 31, 2011. Treasury has stated it does not expect us to be an active buyer to increase the size of our mortgage-
related investments portfolio, but also does not expect that active selling will be necessary to meet the required portfolio
reduction targets. In addition, FHFA has stated that, given the size of our current mortgage-related investments portfolio and
43 Freddie Mac