Fannie Mae 2004 Annual Report Download - page 186

requirement by $3.8 billion, or 9.9%; and our total capital of $42.9 billion as of June 30, 2006 exceeded our
statutory risk-based capital requirement by $16.6 billion, or 62.9%. Because we have not yet prepared audited
consolidated financial statements for any periods after December 31, 2004, OFHEO’s capital classifications for
periods after December 31, 2004 are based on our estimates of our financial condition as of those periods and
remain subject to revision.
Capital Management Framework
Our capital management practices are intended to ensure ongoing compliance with not only our regulatory
capital requirements, but also internal economic capital requirements. Our internal economic capital require-
ments represent management’s view of the capital required to support our risk posture and are used to guide
capital deployment decisions to maximize long-term stockholder value. Our economic capital framework relies
upon both stress test and value-at-risk analyses that measure capital solvency across time and to current market
value exposures. We currently target a combined corporate economic capital requirement that is less than our
regulatory capital requirements.
To ensure compliance with each of our regulatory capital requirements, we maintain different levels of capital
surplus for each capital requirement. The optimal surplus amount for each capital measure is directly tied to
the volatility of the capital requirement and related core capital base. Because it is explicitly tied to risk, the
statutory risk-based capital requirement tends to be more volatile than the ratio-based minimum capital
requirement. Quarterly changes in economic conditions (such as interest rates, spreads and home prices) can
materially impact the calculated risk-based capital requirement. As a consequence, we generally strive to
maintain a larger surplus over the risk-based capital requirement to ensure continued compliance.
We are able to reasonably estimate our minimum capital requirement. However, because changes in the fair
value of our derivatives may result in significant fluctuations in our capital holdings from period to period, the
amount of our reported capital holdings at each period end is difficult to anticipate. Accordingly, we target a
surplus above the statutory minimum capital requirement and OFHEO-directed minimum capital requirement
to accommodate a wide range of possible valuation changes that might adversely impact our core capital base.
Capital Activity
OFHEO Oversight of Our Capital Activity
Our capital requirements as set forth by the Charter Act and as administered by OFHEO may restrict the
ability of our Board of Directors to pay dividends, repurchase our preferred or common stock, or make any
other capital distributions in the following circumstances:
• if a capital distribution would decrease our total capital below the risk-based capital requirement or our
core capital below the minimum capital requirement, we may not make the distribution without the
approval of OFHEO;
• if we do not meet the risk-based capital requirement but do meet the minimum capital requirement, we
may not make any capital distribution that would cause us to fail to meet the minimum capital
requirement; and
• if we meet neither the risk-based capital requirement nor the minimum capital requirement, but do meet the
critical capital requirement established under the 1992 Act, we may make a capital distribution only if,
immediately after making the distribution, we would still meet the critical capital requirement and the Director
of OFHEO approves the distribution after determining that specified statutory conditions are satisfied.
In addition, in the May 2006 OFHEO consent order, we agreed to the following additional restrictions relating
to our capital activity:
• We must continue our commitment to maintain a 30% capital surplus over our statutory minimum capital
requirement until such time as the Director of OFHEO determines that the requirement should be
modified or allowed to expire, taking into account factors such as the resolution of accounting and
internal control issues.
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