Fannie Mae 2009 Annual Report Download - page 115

Key factors affecting the results of our Capital Markets group for 2009 compared with 2008 included the
following:
• An increase in net interest income, primarily attributable to an expansion of our net interest yield driven
by a reduction in the average cost of our debt that more than offset a decline in the average yield on our
interest-earning assets.
• The significant reduction in the average cost of our debt during 2009 compared with 2008 was
primarily attributable to a decline in borrowing rates as we replaced higher cost debt with lower cost
debt.
• Our net interest income does not include the effect of the periodic net contractual interest accruals on
our interest rate swaps totaling $3.4 billion in 2009, compared with $1.6 billion in 2008. These
amounts are included in derivatives gains (losses) and reflected in our consolidated statements of
operations as a component of “Fair value gains (losses), net.”
• A substantial decrease in fair value losses. We discuss our fair value losses in “Consolidated Results of
Operations—Fair Value Gains (Losses), Net.”
• The shift to investment gains in 2009 compared with investment losses in 2008 was primarily attributable
to: (1) an increase in gains on portfolio securitizations as we increased our MBS issuance volumes and
sales related to whole loan conduit activity; and (2) an increase in realized gains on sales of
available-for-sale securities as tightening of investment spreads on agency MBS led to higher sale prices.
These gains were partially offset by an increase in lower of cost or fair value adjustments on loans,
primarily driven by a decline in the credit quality of these loans and an increase in interest rates.
• An increase in net other-than-temporary impairment during 2009. We discuss net-other-than-temporary
impairment in “Consolidated Results of Operations—Net Other-Than-Temporary Impairment.”
• We recorded a non-cash charge in 2008 to establish a partial deferred tax asset valuation allowance
against our net deferred tax assets.
Key factors affecting the results of our Capital Markets group for 2008 compared with 2007 included the
following:
• An increase in net interest income, primarily attributable to an expansion of our net interest yield driven
by a reduction in the average cost of our debt that more than offset a decline in the average yield on our
interest-earning assets. The decrease in the average cost of our debt was due to the decline in short-term
interest rates during 2008 and a shift in our funding mix to more short-term debt. The reversal of accrued
interest expense on step-rate debt that we paid off during 2008 also reduced the average cost of our debt.
The increase in our net interest income does not reflect the impact of a significant increase in the net
contractual interest expense on our interest rate swaps.
• A substantial increase in fair value losses. We discuss details on our fair value losses in “Consolidated
Results of Operations-Fair Value Gains (Losses), Net.”
• An increase in net other-than-temporary impairment during 2008. We discuss details on net-other-than-
temporary impairment in “Consolidated Results of Operations-Net Other-Than-Temporary Impairment.”
• A non-cash charge in 2008 to establish a partial deferred tax asset valuation allowance against our net
deferred tax assets. As a result of the partial deferred tax valuation allowance, we did not record tax
benefits for the majority of the losses we incurred during 2008. The allocation of this charge to our
Capital Markets group resulted in a provision for federal income taxes of $8.5 billion for 2008, compared
with a tax benefit of $1.1 billion for 2007.
CONSOLIDATED BALANCE SHEET ANALYSIS
We seek to structure the composition of our balance sheet and manage its size to comply with our regulatory
requirements, to provide adequate liquidity to meet our needs, and to mitigate our interest rate risk and credit
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