Fannie Mae 2008 Annual Report Download - page 213

Table 57: Interest Rate Sensitivity of Financial Instruments
(1)
Estimated
Fair Value -100 -50 +50 +100
Change in Rates
Pre-tax Effect on Estimated Fair Value
As of December 31, 2008
(Dollars in millions)
Trading financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,806 $ 1,425 $ 758 $ (962) $(1,983)
Guaranty assets and guaranty obligations, net
(2)
. . . . . . . . . . . . . . (90,992) 11,934 5,620 (6,739) (7,603)
Other financial instruments, net
(3)
. . . . . . . . . . . . . . . . . . . . . . . (131,881) (1,589) (445) (893) (1,829)
Estimated
Fair Value -100 -50 +50 +100
Change in Rates
Pre-tax Effect on Estimated Fair Value
As of December 31, 2007
(Dollars in millions)
Trading financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,956 $ 1,595 $ 829 $ (877) $(1,796)
Guaranty assets and guaranty obligations, net
(2)
. . . . . . . . . . . . . (7,055) (1,514) (1,290) (2,111) (1,135)
Other financial instruments, net
(3)
. . . . . . . . . . . . . . . . . . . . . . . (54,084) (3,313) (1,216) 676 1,065
(1)
Excludes some instruments that we believe have interest rate risk exposure, such as LIHTC partnership assets and
preferred stock; however, we include the interest rate sensitivities of these instruments in both the duration and fair
value sensitivities presented above.
(2)
Consists of the net of “Guaranty assets” and “Guaranty obligations” reported in our consolidated balance sheets. In
addition, includes certain amounts that have been reclassified from “Mortgage loans” reported in our consolidated
balance sheets to reflect how the risk of the interest rate and credit risk components of these loans is managed by our
business segments.
(3)
Consists of the net of all other financial instruments reported in “Notes to Consolidated Financial Statements—
Note 20, Fair Value of Financial Instruments.”
The interest rate sensitivity of our trading financial instruments generally increased as of December 31, 2008
from December 31, 2007, due in part to the reclassification of $18.1 billion of mortgage assets as trading in
conjunction with our adoption of SFAS 159 as of January 1, 2008. Both our guaranty assets and our guaranty
obligations generally increase in fair value when interest rates increase and decrease in fair value when interest
rates decline. Changes in the combined sensitivity of the guaranty asset and obligation over this period were
largely driven by the significant increase in the fair value of the guaranty obligation.
Operational Risk Management
Operational risk can manifest itself in many ways, including accounting or operational errors, business
disruptions, fraud, human errors, technological failures and other operational challenges resulting from failed
or inadequate internal controls. These events may potentially result in financial losses and other damage to our
business, including reputational harm. Our operational risk management framework includes policies and
operational standards designed to identify, measure, monitor and manage operational risks across the company.
We rely on our employees and our internal financial, accounting, cash management, data processing and other
operating systems, as well as technological systems operated by third parties, to manage our business. In the
face of the current challenging market environment and changes that the company is experiencing, we have
increased support for our training programs and employee communications in the furtherance of operational
risk management.
In addition to the corporate operational risk oversight function, we also maintain programs for the
management of our exposure to other key operational risks, such as mortgage fraud, breaches in information
security and external disruptions to business continuity. These risks are not unique to us and are inherent in
the financial services industry.
We continue to enhance our operational risk management framework. This operational risk management
framework is based on the Basel Committee guidance on sound practices for the management of operational
risk broadly adopted by U.S. commercial banks comparable in size to Fannie Mae. We are tracking
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