Freddie Mac 2006 Annual Report Download - page 143

critical capital requirement or our Core capital falls below our minimum capital requirement and pursuant to our request,
the Secretary of the Treasury exercises discretionary authority to purchase our obligations under Section 306(c) of our
charter. Qualifying subordinated debt will be discounted for the purposes of this commitment as it approaches maturity with
one-Ñfth of the outstanding amount excluded each year during the instrument's last Ñve years before maturity. When the
remaining maturity is less than one year, the instrument is entirely excluded.
Table 10.2 summarizes our compliance with our subordinated debt commitment.
Table 10.2 Ì Subordinated Debt Commitment
December 31,
2006 2005
(in millions)
Total on-balance sheet assets and guaranteed PCs and Structured Securities outstanding target(1)(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $37,576 $36,633
Total capital plus qualifying subordinated debt(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 42,602 41,831
Surplus(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,026 5,198
(1) Equals the sum of 0.45 percent of outstanding guaranteed PCs and Structured Securities and 4 percent of on-balance sheet assets.
(2) Amounts for 2006 are based on amended reports we submitted to OFHEO in March 2007.
Regulatory Capital Monitoring Framework
In a letter dated January 28, 2004, OFHEO created a framework for monitoring our capital due to our higher
operational risk, including our inability to produce timely Ñnancial statements in accordance with GAAP. The letter directed
that we maintain a mandatory target capital surplus of 30 percent over our minimum capital requirement, subject to certain
conditions and variations; that we submit weekly reports concerning our capital levels; and that we obtain prior approval of
certain capital transactions.
Our failure to meet the mandatory target capital surplus would result in an OFHEO inquiry regarding the reason for
such failure. If OFHEO were to determine that we had acted unreasonably regarding our compliance with the framework,
as set forth in OFHEO's letter, OFHEO could seek to require us to submit a remedial plan or take other remedial steps.
In addition, under this framework, we are required to obtain prior written approval from the Director of OFHEO before
engaging in certain capital transactions, as described above. We must also submit a written report to the Director of
OFHEO after the declaration, but before the payment, of any dividend on our common stock. The report must contain
certain information on the amount of the dividend, the rationale for the payment and the impact on our capital surplus.
This framework will remain in eÅect until the Director of OFHEO determines that it should be modiÑed or expire.
OFHEO's letter indicated that this determination would consider our resumption of timely Ñnancial and regulatory reporting
that complies with GAAP, among other factors.
Table 10.3 summarizes our compliance with the mandatory target capital surplus portion of OFHEO's capital
monitoring framework.
Table 10.3 Ì Mandatory Target Capital Surplus
December 31,
2006 2005
(in millions)
Minimum capital requirement plus 30% add-on(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $33,597 $32,513
Core capital(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 36,170 35,964
Surplus(1)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,573 3,451
(1) Amounts for 2006 are based on amended reports we submitted to OFHEO in March 2007.
NOTE 11: STOCK-BASED COMPENSATION
We have three stock-based compensation plans under which grants are being made: (a) the ESPP; (b) the 2004 Stock
Compensation Plan, or 2004 Employee Plan; and (c) the 1995 Directors' Stock Compensation Plan, as amended and
restated, or Directors' Plan. Prior to the stockholder approval of the 2004 Employee Plan, employee stock-based
compensation was awarded in accordance with the terms of the 1995 Stock Compensation Plan, or 1995 Employee Plan.
Although grants are no longer made under the 1995 Employee Plan, we currently have awards outstanding under this plan.
We collectively refer to the 2004 Employee Plan and 1995 Employee Plan as the Employee Plans.
Common stock delivered under these plans may consist of authorized but previously unissued shares, treasury stock or
shares acquired in market transactions on behalf of the participants. During 2006, stock-based awards we granted consisted
of stock options and restricted stock units. Such awards, discussed below, are generally forfeitable for at least one year after
the grant date, with vesting provisions contingent upon service requirements.
131 Freddie Mac