Fannie Mae 2008 Annual Report Download - page 398

fair value with subsequent changes in fair value recorded in “Fair value losses, net” in our consolidated
statements of operations.
Structured debt instruments
We elected the fair value option for short-term and long-term structured debt instruments that are issued in
response to specific investor demand and have interest rates that are based on a calculated index or formula
and that are economically hedged with derivatives at the time of issuance. By electing the fair value option for
these instruments, we are able to eliminate the volatility in our results of operations that would otherwise
result from the accounting asymmetry created by the accounting for these structured debt instruments at cost
while accounting for the related derivatives at fair value. As of December 31, 2008, these instruments had an
aggregate fair value and unpaid principal balance of $4.5 billion recorded in “Short-term debt,” and an
aggregate fair value and unpaid principal balance of $21.6 billion and $21.5 billion, respectively, recorded in
“Long-term debt,” in our consolidated balance sheet.
Following the election of the fair value option, these debt instruments are recorded at fair value with
subsequent changes in fair value recorded in “Fair value losses, net.” These structured debt instruments
continue to be classified as either “Short-term debt” or “Long-term debt” in our consolidated balance sheets
based on their original maturities. Interest accrued on these short-term and long-term debt instruments
continues to be recorded in “Interest expense” in our consolidated statement of operations.
Changes in Fair Value under the Fair Value Option Election
The following table displays debt fair value losses, net, including changes attributable to instrument-specific
credit risk. Amounts are recorded as a component of “Fair value losses, net” in our consolidated statement of
operations for the year ended December 31, 2008, for which the fair value election was made.
Short-Term
Debt
Long-Term
Debt
Total Gains
(Losses)
For the Year Ended December 31, 2008
(Dollars in millions)
Changes in instrument-specific credit risk ............. $ 6 $ 94 $100
Other changes in fair value ....................... (6) (151) (157)
Debt fair value losses, net ........................ $— $ (57) $ (57)
In determining the instrument-specific risk, the changes in Fannie Mae debt spreads to LIBOR that occurred
during the period were taken into consideration with the overall change in the fair value of the debt for which
we elected the fair value option under SFAS 159. Specifically, cash flows are evaluated taking into
consideration any derivatives through which Fannie Mae has swapped out of the structured features of the
notes and thus created a floating rate LIBOR-based debt instrument. The change in value of these LIBOR-
based cash flows based on the Fannie Mae yield curve at the beginning and end of the period represents the
instrument-specific risk.
21. Commitments and Contingencies
Legal Contingencies
We are party to various types of legal proceedings that are subject to many uncertain factors that are not
recorded in our consolidated financial statements. Litigation claims and proceedings of all types are subject to
many uncertain factors that generally cannot be predicted with assurance. The following describes our material
legal proceedings, examinations and other matters. An unfavorable outcome in certain of these legal
proceedings could have a material adverse effect on our business, financial condition, results of operations and
F-120
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)