Fannie Mae 2008 Annual Report Download - page 112

classified as trading. Our portfolio of trading securities totaled $90.8 billion as of December 31, 2008,
compared with $64.0 billion and $11.5 billion as of December 31, 2007 and 2006, respectively.
The primary driver of the increase in losses on trading securities in 2008 compared with 2007 was a continued
and significant widening of spreads, particularly on private-label mortgage-related securities backed by Alt-A
and subprime loans and commercial mortgage-backed securities (“CMBS”) backed by multifamily mortgage
loans. In addition, we experienced losses on non-mortgage securities in our cash and other investments
portfolio totaling $2.7 billion due to significant declines in the market value of these securities, particularly
during the third quarter of 2008, due to the widespread financial market crisis. Approximately $809 million of
these non-mortgage security losses related to investments in corporate debt securities issued by Lehman
Brothers, Wachovia Corporation, Morgan Stanley and American International Group, Inc. (referred to as AIG).
Our exposure to Lehman Brothers accounted for $608 million of the $809 million in losses.
The increase in losses on trading securities in 2007 compared with 2006 resulted from the widening of
spreads, particularly related to private-label mortgage-related securities backed by Alt-A and subprime loans,
that began in the second half of 2007.
We provide additional information on our trading and available-for-sale securities in “Consolidated Balance
Sheet Analysis—Trading and Available-for-Sale Investment Securities” and disclose the sensitivity of changes
in the fair value of our trading securities to changes in interest rates in “Risk Management—Interest Rate Risk
Management and Other Market Risks—Interest Rate Risk Metrics.”
Hedged Mortgage Assets Gains (Losses), Net
Our hedge accounting relationships during 2008 consisted of pay-fixed interest rate swaps designated as fair
value hedges of changes in the fair value, attributable to changes in the LIBOR benchmark interest rate, of
specified mortgage assets. For these relationships, we included changes in the fair value of hedged mortgage
assets attributable to changes in the benchmark interest rate in our assessment of hedge effectiveness. These
fair value accounting hedges resulted in gains on the hedged mortgage assets of $2.2 billion for 2008, which
were offset by losses of $2.2 billion on the pay-fixed swaps designated as hedging instruments. The losses on
these pay-fixed swaps are included as a component of derivatives fair value gains (losses), net. We also
recorded as a component of derivatives fair value gains (losses) the ineffectiveness, or the portion of the
change in the fair value of our derivatives that was not effective in offsetting the change in the fair value of
the designated hedged mortgage assets. We recorded losses of $94 million for 2008 attributable to
ineffectiveness of our fair value hedges.
Because we discontinued hedge accounting during the fourth quarter of 2008, we did not have any derivatives
designated as hedges as of December 31, 2008. We provide additional information on our application of hedge
accounting during 2008 in “Notes to Consolidated Financial Statements, Note 2—Summary of Significant
Accounting Policies” and “Note 11—Derivative Instruments and Hedging Activities.”
Losses from Partnership Investments
Our partnership investments, which primarily include investments in LIHTC partnerships as well as
investments in other affordable rental and for-sale housing partnerships, totaled approximately $9.3 billion and
$11.0 billion as of December 31, 2008 and 2007, respectively. These investments historically have played a
significant role in advancing our affordable housing mission. We provide additional information about these
investments in “Part I—Item 1—Business—Business Segments—Housing and Community Development
Business.”
Losses from partnership investments totaled $1.6 billion, $1.0 billion and $865 million in 2008, 2007 and
2006, respectively. The increase in losses in 2008 was primarily due to impairment charges of $510 million on
our LIHTC partnership investments that we recorded during the second half of 2008. Our decision in the third
quarter of 2008 to establish a deferred tax asset valuation allowance indicated that we may be unable to
realize the future tax benefits generated by our LIHTC partnership investments. As a result, we determined
that the potential loss on the carrying value of these investments was other than temporary. Accordingly, we
recorded other-than-temporary impairment for LIHTC partnership investments that had a carrying value that
exceeded the fair value in 2008. The losses on our LIHTC partnership investments in 2008 were partially
107