Fannie Mae 2009 Annual Report Download - page 383

Structured debt instruments
We elected the fair value option for all 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 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 recording these structured debt instruments at cost while
recording the related derivatives at fair value.
As of December 31, 2009, these instruments had an aggregate fair value and unpaid principal balance of
$3.3 billion and $3.2 billion, respectively, recorded in “Long-term debt,” in our consolidated balance sheet.
There were no outstanding short-term structured debt instruments elected under the fair value option remaining
as of December 31, 2009. As of December 31, 2008, these instruments had both 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 sheets.
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” in our consolidated statements of
operations. 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 contractual maturities.
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, for financial instruments for which the fair value election was made. Amounts are recorded as a
component of “Fair value losses, net” in our consolidated statements of operations for the years ended
December 31, 2009 and 2008.
Short-Term
Debt
Long-Term
Debt
Total Gains
(Losses)
Short-Term
Debt
Long-Term
Debt
Total Gains
(Losses)
2009 2008
For the Year Ended December 31,
(Dollars in millions)
Changes in instrument-specific credit risk . . . $— $ 33 $ 33 $ 6 $ 94 $ 100
Other changes in fair value . . . . . . . . . . . . . — (64) (64) (6) (151) (157)
Debt fair value losses, net. . . . . . . . . . . . . $— $(31) $(31) $— $ (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 for financial instruments. 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.
20. Commitments and Contingencies
Litigation and Regulatory Matters
We are party to various types of legal actions and proceedings, including actions brought on behalf of various
classes of claimants. We also are subject to regulatory examinations, inquiries and investigations and other
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FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)