Fannie Mae 2004 Annual Report Download - page 338

(6)
Defined as the amount of total capital required to be held to absorb projected losses flowing from future adverse
interest rate and credit risk conditions specified by statute (see 12 CFR 1750.13 for conditions), plus 30% mandated by
statute to cover management and operations risk.
(7)
Generally, the sum of (a) 1.25% of on-balance sheet assets; (b) 0.25% of the unpaid principal balance of outstanding
Fannie Mae MBS held by third parties and (c) up to 0.25% of other off-balance sheet obligations, which may be
adjusted by the Director of OFHEO under certain circumstances.
(8)
Defined as the surplus of core capital over critical capital expressed as a percentage of critical capital.
Factors that may result in potentially volatile components of capital include changes in net income primarily
due to changes in fair values of derivatives and the size of our balance sheet assets, which may vary by
marking to market AFS and trading securities.
Capital Classification
The 1992 Act requires the Director of OFHEO to determine the capital level and classification at least
quarterly and to report the results to Congress. If OFHEO finds that we fail to meet these regulatory capital
standards, we become subject to certain restrictions and requirements. OFHEO classified us as adequately
capitalized as of December 31, 2003 and significantly undercapitalized as of September 30, 2004 and
December 31, 2004.
In response to the initial findings from OFHEO’s September 2004 special examination interim report, we
entered into the September 27, 2004 agreement with OFHEO (the “OFHEO Agreement”), which required us
to take a series of steps with respect to our internal controls, organization and staffing, governance, accounting
and capital. In accordance with the OFHEO Agreement, which, as described below, has since been terminated,
we were required to obtain prior written approval from the Director of OFHEO before engaging in certain
capital transactions, including any payment made to repurchase, redeem, retire or otherwise acquire any of our
shares, including share repurchases; the calling of any preferred stock; as well as the restrictions on dividend
payments described below.
As part of the OFHEO Agreement, we pledged to maintain the computed minimum capital surplus percentage
of 18.5% that we reported as of August 31, 2004, and to achieve a targeted capital surplus equal to 30% over
the statutory required minimum capital requirement within 270 days of the agreement. In November 2004,
pursuant to the OFHEO Agreement, we submitted a capital plan to OFHEO for the Director’s approval
detailing how management intended to achieve the 30% surplus requirement, including alternative strategies
that might be employed in response to various market developments.
On December 21, 2004, following the SEC’s determination that we should restate our financial statements, OFHEO
classified us as significantly undercapitalized as of September 30, 2004 and directed us to submit a capital
restoration plan that would provide for compliance with our statutory minimum capital requirement plus a surplus
of 30% over the statutory minimum capital requirement. Pursuant to OFHEO’s directive, we submitted a capital
restoration plan within 10 days of receiving OFHEO’s directive. The final form of the capital restoration plan was
approvedbyOFHEOinFebruary2005andrequiredustoachievethe30%surplusbySeptember30,2005.Under
the plan, we intended to achieve the 30% capital surplus through (i) managing total balance sheet asset size by
reducing the portfolio principally through normal mortgage liquidations in order to limit overall minimum capital
requirements; and (ii) increasing core capital through increasing retained earnings, the December 2004 issuance of
$5.0 billion of preferred stock, reducing the common stock dividend by 50%, and cost-cutting efforts to augment
capital accumulation. As OFHEO directed, the plan also incorporated a formal process of monitoring and reporting
to the agency on our progress in carrying out the plan.
Dividend Restrictions
During the period that we were considered adequately capitalized by OFHEO, approval by the Director of
OFHEO was required for any dividend payment that would cause our capital to fall below specified capital
levels. We exceeded the applicable capital standard for every quarter since the adoption of these requirements
in 1992 until OFHEO classified us as significantly undercapitalized as of September 30, 2004.
F-87
FANNIE MAE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)