Fannie Mae 2009 Annual Report Download - page 295

techniques that use observable market-based inputs or unobservable inputs that are corroborated by market
data. Pricing information we obtain from third parties is internally validated for reasonableness prior to use in
the consolidated financial statements.
On April 1, 2009, we adopted the FASB standard on how to determine fair value when the volume and level
of activity for the asset or liability have significantly decreased. The standard reaffirms that (1) the objective
of fair value when the market for an asset is not active is the price that would be received to sell the asset in
an orderly transaction at the date of the financial statements under current market conditions; and (2) the need
to use judgment to ascertain if a formerly active market has become inactive and in determining fair values
when markets have become inactive. The application of this standard had no impact on our consolidated
financial statements.
When observable market prices are not readily available, we generally estimate the fair value using techniques
that rely on alternate market data or internally developed models. These models use significant inputs that are
generally less readily observable than objective sources. Market data includes prices of financial instruments
with similar maturities and characteristics, duration, interest rate yield curves, measures of volatility and
prepayment rates. If market data we need to estimate fair value is not available, we estimate fair value using
internally-developed models that employ a discounted cash flow approach.
We base these estimates on pertinent information available to us at the time of the applicable reporting
periods. In certain cases, fair values are not subject to precise quantification or verification and may fluctuate
as economic and market factors vary and our evaluation of those factors changes. Although we use our best
judgment in estimating the fair value of these financial instruments, there are inherent limitations in any
estimation technique. In these cases, a minor change in an assumption could result in a significant change in
our estimate of fair value, thereby increasing or decreasing the amounts of our consolidated assets, liabilities,
stockholders’ equity (deficit) and net income or loss.
Fair Value Losses, Net
Fair value losses, net, consists of fair value gains and losses on derivatives, trading securities, debt carried at
fair value, foreign currency debt, and adjustments to the carrying amount of hedged mortgage assets. The
following table displays the composition of “Fair value losses, net” for the years ended December 31, 2009,
2008 and 2007.
2009 2008 2007
For the Year Ended December 31,
(Dollars in millions)
Derivatives fair value losses, net
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6,350) $(15,416) $(4,113)
Trading securities gains (losses), net
(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,744 (7,040) (365)
Hedged mortgage asset gains, net
(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,154 —
Debt foreign exchange gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . (173) 230 (190)
Debt fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32) (57) —
Fair value losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,811) $(20,129) $(4,668)
(1)
Includes losses of approximately $104 million in 2008 that resulted from the termination of our derivative contracts
with a subsidiary of Lehman Brothers.
(2)
Includes trading losses of $608 million in 2008 that resulted from the write-down to fair value of our investment in
corporate debt securities issued by Lehman Brothers.
(3)
Represents adjustments to the carrying value of mortgage assets designated for hedge accounting that are attributable
to changes in interest rates.
F-37
FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)