Fannie Mae 2012 Annual Report Download - page 339

FANNIE MAE
(In conservatorship)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
F-105
Changes in Fair Value under the Fair Value Option Election
The following table displays fair value gains and losses, net, including changes attributable to instrument-specific credit risk,
for loans and debt 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 and comprehensive income (loss) for the years ended December 31, 2012,
2011 and 2010.
For the Year Ended December 31,
2012 2011 2010
Loans Long- Term Debt Total Losses Loans Long- Term Debt Total Losses Loans Long- Term Debt Total Losses
(Dollars in millions)
Changes in instrument-specific
credit risk . . . . . . . . . . . . . . . . . . $ (25) $ (13) $ (38) $(215) $ 10 $ (205) $ (58) $ (9) $ (67)
Other changes in fair value . . . . . . (124) (76) (200) 79 (92)(13)(73) 14 (59)
Fair value (losses) gains, net. . . $ (149) $ (89) $(238) $(136) $ (82) $ (218) $ (131) $ 5 $(126)
In determining the changes in the instrument-specific credit risk for loans, the changes in the associated credit-related
components of these loans, primarily the guaranty obligation, were taken into consideration with the overall change in the fair
value of the loans for which we elected the fair value option for financial instruments. In determining the changes in the
instrument-specific credit risk for debt, 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.
18. Commitments and Contingencies
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 information gathering
requests. In some of the matters, indeterminate amounts are sought. Modern pleading practice in the U.S. permits
considerable variation in the assertion of monetary damages or other relief. Jurisdictions may permit claimants not to specify
the monetary damages sought or may permit claimants to state only that the amount sought is sufficient to invoke the
jurisdiction of the trial court. This variability in pleadings, together with our and our counsel’s actual experience in litigating
or settling claims, leads us to conclude that the monetary relief that may be sought by plaintiffs bears little relevance to the
merits or disposition value of claims.
On a quarterly and annual basis, we review relevant information about all pending legal actions and proceedings for the
purpose of evaluating and revising our contingencies, reserves and disclosures.
Legal actions and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with
assurance. Accordingly, the outcome of any given matter and the amount or range of potential loss at particular points in time
is frequently difficult to ascertain. Uncertainties can include how fact finders will evaluate documentary evidence and the
credibility and effectiveness of witness testimony, and how trial and appellate courts will apply the law. Disposition
valuations are also subject to the uncertainty of how opposing parties and their counsel view the evidence and applicable law.
Further, FHFA adopted a regulation in 2011, which provides, in part, that while we are in conservatorship, FHFA will not pay
claims by our current or former shareholders, unless the Director of FHFA determines it is in the interest of the
conservatorship. The presence of this regulation and the Director of FHFA’s assertion that FHFA will not pay claims asserted
in certain cases discussed below while we are in conservatorship creates additional uncertainty in those cases.
We establish a reserve for those matters when a loss is probable and we can reasonably estimate the amount of such loss.
Reserves have been established for certain of the matters noted below. These reserves did not have a material adverse effect
on our financial statements. We note, however, that in light of the uncertainties involved in such actions and proceedings,
there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves we have currently
accrued.