Fannie Mae 2005 Annual Report Download - page 165

adequately capitalized as of December 31, 2006. Our core capital of $42.3 billion as of December 31, 2006
exceeded our statutory minimum capital requirement by $13.0 billion, or 44.2%, and our OFHEO-directed
minimum capital requirement by $4.2 billion, or 10.9%. Our total capital of $43.0 billion as of December 31,
2006 exceeded our statutory risk-based capital requirement by $16.2 billion, or 60.2%. Because we have not
yet prepared audited consolidated financial statements for any periods after December 31, 2005, OFHEO’s
capital classifications for periods after December 31, 2005 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 using long-term financial
simulations and near-term market value shocks. 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 seek to
maintain a larger surplus over the risk-based capital requirement to ensure continued compliance.
While we are able to reasonably estimate the size of our book of business and therefore our minimum capital
requirement, the amount of our reported core capital holdings at each period end is less certain without hedge
accounting treatment. Changes in the fair value of our derivatives may result in significant fluctuations in our
capital holdings from period to period. 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 1992 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. If such an action 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.
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.
• As long as the capital restoration plan is in effect, we must seek the approval of the Director of OFHEO
before engaging in any transaction that could have the effect of reducing our capital surplus below an
amount equal to 30% more than our statutory minimum capital requirement.
• We must submit a written report to OFHEO detailing the rationale and process for any proposed capital
distribution before making the distribution.
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