Fannie Mae 2009 Annual Report Download - page 179

Our cash and other investments portfolio which totaled $69.4 billion as of December 31, 2009, included
$45.8 billion of unsecured positions with issuers of corporate debt securities or short-term deposits with
financial institutions, of which approximately 92% were with issuers which had a credit rating of AA (or its
equivalent) or higher, based on the lowest of Standard & Poor’s, Moody’s and Fitch ratings. As of
December 31, 2008, our cash and other investments portfolio totaled $93.0 billion and included $56.7 billion
of unsecured positions with issuers of corporate debt securities or short-term deposits with financial
institutions, of which approximately 93% were with issuers which had a credit rating of AA (or its equivalent)
or higher, based on the lowest of Standard & Poor’s, Moody’s and Fitch ratings.
Due to the economic recession that began in December 2007 and the continuing weak economy, substantially
all of the issuers of non-mortgage related securities in our cash and other investments portfolio have
experienced financial difficulties, ratings downgrades and/or liquidity constraints, which have significantly
reduced the market value and liquidity of these investments, and we could experience further losses relating to
these securities. We no longer purchase these non-mortgage-related securities and intend to either continue to
sell them from time to time as market conditions permit or allow them to mature, depending on which
alternative we believe will deliver a better economic return.
We monitor the credit risk position of our cash and other investments portfolio by duration and rating level. In
addition, we monitor the financial position and any downgrades of these counterparties. The outcome of our
monitoring could result in a range of events, including selling some of these investments. During 2009, we
have reduced the number of counterparties in our cash and other investments portfolio. If one of our primary
cash and other investments portfolio counterparties fails to meet its obligations to us under the terms of the
securities, it could result in financial losses to us and have a material adverse effect on our earnings, liquidity,
financial condition and net worth.
Derivatives Counterparties
Our derivative credit exposure relates principally to interest rate and foreign currency derivatives contracts. We
estimate our exposure to credit loss on derivative instruments by calculating the replacement cost, on a present
value basis, to settle at current market prices all outstanding derivative contracts in a net gain position by
counterparty where the right of legal offset exists, such as master netting agreements, and by transaction where
the right of legal offset does not exist. Derivatives in a gain position are reported in our consolidated balance
sheets as “Derivative assets at fair value.”
We present our credit loss exposure for our outstanding risk management derivative contracts, by counterparty
credit rating, as of December 31, 2009 and 2008 in “Note 10, Derivative Instruments and Hedging Activities.”
We expect our credit exposure on derivative contracts to fluctuate with changes in interest rates, implied
volatility and the collateral thresholds of the counterparties. Typically, we seek to manage this exposure by
contracting with experienced counterparties that are rated A- (or its equivalent) or better. These counterparties
consist of large banks, broker-dealers and other financial institutions that have a significant presence in the
derivatives market, most of which are based in the United States.
We also manage our exposure to derivatives counterparties by requiring collateral in specified instances. We
have a collateral management policy with provisions for requiring collateral on interest rate and foreign
currency derivative contracts in net gain positions based upon the counterparty’s credit rating. The collateral
includes cash, U.S. Treasury securities, agency debt and agency mortgage-related securities. Cash collateral
posted to us prior to July 2009 and non-cash collateral posted to us at any time is held and monitored daily by
a third-party custodian. Since July 2009, cash collateral posted to us is held and monitored by us and
transacted through a third party. We analyze credit exposure on our derivative instruments daily and make
collateral calls as appropriate based on the results of internal pricing models and dealer quotes. In the case of
a bankruptcy filing by an interest rate or foreign currency derivative counterparty or other default by the
counterparty under the derivative contract, we would have the right to terminate all outstanding derivative
contracts with that counterparty and may retain collateral previously posted by that counterparty to the extent
that we are in a net gain position on the termination date.
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