Fannie Mae 2006 Annual Report Download - page 115

• We generated net cash of $41.6 billion in operating activities in 2004, primarily due to net income and a
net decrease in trading securities. Our cash generated by operating activities was partially offset by
purchases of HFS loans.
• We used net cash of $16.8 billion in investing activities in 2004, primarily due to advances to lenders and
purchases of AFS securities and HFI loans. The cash we used in investing activities was partially offset
by proceeds we received from maturities of AFS securities and repayments of HFI loans.
• We used net cash of $25.5 billion in financing activities in 2004, primarily for the redemption of short-
term and long-term debt. The cash we used in financing activities was offset primarily by issuances of our
short-term and long-term debt.
Capital Management
Our objective in managing capital is to maximize long-term stockholder value through the pursuit of business
opportunities that provide attractive returns while maintaining capital at levels sufficient to ensure compliance
with both our regulatory and internal capital requirements.
Capital Management Framework
As part of its responsibilities under the 1992 Act, OFHEO has regulatory authority as to the capital
requirements established by the 1992 Act, issuing regulations on capital adequacy and enforcing capital
standards. The 1992 Act capital standards include minimum and critical capital requirements calculated as
specified percentages of our assets and our off-balance sheet obligations, such as outstanding guaranties. In
addition, the 1992 Act capital requirements include a risk-based capital requirement that is calculated as the
amount of capital needed to withstand a severe ten-year stress period characterized by extreme movements in
interest rates and simultaneous severe credit losses. Moreover, to allow for management and operations risks,
an additional 30% is added to the amount necessary to withstand the ten-year stress period. A detailed
description of our regulatory capital requirements can be found in “Item 1—Business—Our Charter and
Regulation of Our Activities—OFHEO Regulation—Capital Adequacy Requirements.”
Our internal economic capital requirements 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 was the case in 2006. 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.
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