Freddie Mac 2014 Annual Report Download - page 28

23 Freddie Mac
Covenants Under the Treasury Agreements
The Purchase Agreement and warrant contain covenants that significantly restrict our business activities. For example,
the Purchase Agreement provides that, until the senior preferred stock is repaid or redeemed in full, we may not, without the
prior written consent of Treasury:
• pay dividends on or repurchase our equity securities (other than the senior preferred stock or warrant);
• issue any additional equity securities (except in limited instances);
• sell, transfer, lease or otherwise dispose of any assets, other than dispositions for fair market value in limited
circumstances including: (a) if the transaction is in the ordinary course of business, consistent with past practice, or (b)
in one transaction or a series of related transactions if the assets have a fair market value individually or in the
aggregate of less than $250 million; and
• issue any subordinated debt.
The Purchase Agreement also requires us to reduce the amount of mortgage assets we own, as described in "Limits on
Investment Activity and our Mortgage-Related Investments Portfolio." 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.
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.
For more information on the covenants in the Purchase Agreement and the warrant, see “NOTE 2: CONSERVATORSHIP
AND RELATED MATTERS — Purchase Agreement and Warrant — Purchase Agreement Covenants” and “— Warrant
Covenants.”
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. 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.
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. FHFA is responsible for implementing the various provisions of the GSE Act that were
added by the Reform Act.
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 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 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 set forth in the GSE Act.
Certain aspects of conservatorship and receivership operations of Freddie Mac, Fannie Mae and the FHLBs are addressed
in an FHFA rule. Among other provisions, the rule indicates that FHFA generally will not permit payment of securities
litigation claims during conservatorship and that claims by current or former shareholders arising as a result of their status as
shareholders would receive the lowest priority of claim in receivership. In addition, the rule indicates that administrative
expenses of the conservatorship will also be deemed to be administrative expenses of a subsequent receivership and that capital
distributions may not be made during conservatorship, except as specified in the rule.
Capital Standards
FHFA suspended capital classification of us during conservatorship in light of the Purchase Agreement. The existing
statutory and FHFA-directed regulatory capital requirements are not binding during the conservatorship. These capital
standards are described in "NOTE 18: REGULATORY CAPITAL." Under the GSE Act, FHFA has the authority to increase our
minimum capital levels or to establish additional capital and reserve requirements for particular purposes.
Pursuant to an FHFA rule, FHFA-regulated entities are required to conduct annual stress tests to determine whether such
companies have sufficient capital to absorb losses as a result of adverse economic conditions. Under the rule, Freddie Mac is
required to: (a) conduct annual stress tests using scenarios specified by FHFA that reflect a minimum of three sets of economic
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