Fannie Mae 2004 Annual Report Download - page 188

issuances represent the largest capital placement we have ever undertaken and were a key component of our
capital restoration plan. We obtained net proceeds of $1.4 billion in 2003 through non-cumulative preferred stock
issuances. We did not redeem any preferred stock during 2005, 2004 or 2003 and to date have not redeemed any
preferred stock in 2006. Our ability to issue preferred stock in the public market will be limited until we return
to timely financial reporting. We have not issued preferred stock since December 31, 2004.
Subordinated Debt
On September 1, 2005, we agreed with OFHEO to make specific commitments relating to the issuance of
qualifying subordinated debt. These commitments replaced our October 2000 voluntary initiatives relating to
the maintenance of qualifying subordinated debt. We agreed to issue qualifying subordinated debt, rated by at
least two nationally recognized statistical rating organizations, in a quantity such that the sum of our total
capital plus the outstanding balance of our qualifying subordinated debt equals or exceeds the sum of
(1) outstanding Fannie Mae MBS held by third parties times 0.45% and (2) total on-balance sheet assets times
4%. We must also take reasonable steps to maintain sufficient outstanding subordinated debt to promote
liquidity and reliable market quotes on market values. We also agreed to provide periodic public disclosure of
our compliance with these commitments, including a comparison of the quantities of subordinated debt and
total capital to the levels required by our agreement with OFHEO.
Every six months, commencing January 1, 2006, we are required to submit to OFHEO a subordinated debt
management plan that includes any issuance plans for the upcoming six months. Although it is not a
component of core capital, subordinated debt supplements our equity capital. It is designed to provide a risk-
absorbing layer to supplement core capital for the benefit of senior debt holders. In addition, the spread
between the trading prices of our subordinated debt and our senior debt serves as a market indicator to
investors of the relative credit risk of our debt. A narrow spread between the trading prices of our subordinated
debt and senior debt implies that the market perceives the credit risk of our debt to be relatively low. A wider
spread between these prices implies that the market perceives our debt to have a higher relative credit risk.
The sum of our total capital plus the outstanding balance of our qualifying subordinated debt exceeded the
sum of (1) outstanding Fannie Mae MBS held by third parties times 0.45% and (2) total on-balance sheet
assets times 4% by $8.4 billion, or 19.9%, as of June 30, 2006, and by $6.9 billion, or 16.8%, as of
December 31, 2005. Qualifying subordinated debt with a remaining maturity of less than five years receives
only partial credit in this calculation. One-fifth of the outstanding amount is excluded each year during the
instrument’s last five years before maturity and, when the remaining maturity is less than one year, the
instrument is entirely excluded.
Qualifying subordinated debt is defined as subordinated debt that contains an interest deferral feature that
requires us to defer the payment of interest for up to five years if either:
• our core capital is below 125% of our critical capital requirement; or
• our core capital is below our minimum capital requirement, and the U.S. Secretary of the Treasury, acting
on our request, exercises his or her discretionary authority pursuant to Section 304(c) of the Charter Act
to purchase our debt obligations.
Core capital is defined by OFHEO and represents the sum of the stated value of our outstanding common
stock (common stock less treasury stock), the stated value of our outstanding non-cumulative perpetual
preferred stock, our paid-in capital and our retained earnings, as determined in accordance with GAAP.
During any period in which we defer payment of interest on qualifying subordinated debt, we may not declare or
pay dividends on, or redeem, purchase or acquire, our common stock or preferred stock. To date, no triggering
events have occurred that would require us to defer interest payments on our qualifying subordinated debt.
Prior to our September 1, 2005 agreement with OFHEO, pursuant to our voluntary initiatives, we sought to
maintain sufficient subordinated debt to bring the sum of total capital and outstanding subordinated debt to at
least 4% of on-balance sheet assets, after providing adequate capital to support Fannie Mae MBS held by third
parties that is not included in the consolidated balance sheets. We had qualifying subordinated debt with a
carrying amount of $12.5 billion, $12.5 billion and $8.5 billion as of December 31, 2004, 2003 and 2002,
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