Freddie Mac 2006 Annual Report Download - page 24

Most of our key business activities are conducted in our principal oÇces located in McLean, Virginia. Despite the
contingency plans and facilities we have in place, our ability to conduct business may be adversely impacted by a disruption
in the infrastructure that supports our business and the communities in which we are located. Potential disruptions may
include those involving electrical, communications, transportation or other services we use or that are provided to us. If a
disruption occurs and our employees are unable to occupy our oÇces or communicate with or travel to other locations, our
ability to service and interact with our customers or counterparties may suÅer and we may not be able to successfully
implement contingency plans that depend on communication or travel.
Our operations rely on the secure processing, storage and transmission of conÑdential and other information in our
computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances
warrant, our computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other
malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could
jeopardize conÑdential and other information, including nonpublic personal information and sensitive business data,
processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or
malfunctions in our operations or the operations of our customers or counterparties, which could result in signiÑcant losses
or reputational damage. We may be required to expend signiÑcant additional resources to modify our protective measures
or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and Ñnancial losses that
are not fully insured. For a discussion of our material weaknesses related to our information technology and systems and our
plans to remediate such weaknesses, see ""MD&A Ì RISK MANAGEMENT Ì Operational Risks Ì Internal Control
Over Financial Reporting.''
We rely on third parties for certain functions that are critical to Ñnancial reporting, our Retained portfolio activity and
mortgage loan underwriting. Any failures by those vendors could disrupt our business operations.
We outsource certain key functions to external parties, including but not limited to (a) processing functions for trade
capture, market risk management analytics, and asset valuation, (b) custody and recordkeeping for our investments
portfolios, and (c) processing functions for mortgage loan underwriting. We may enter into other key outsourcing
relationships in the future. If one or more of these key external parties were not able to perform their functions for a period of
time, at an acceptable service level, or for increased volumes, our business operations could be constrained, disrupted or
otherwise negatively impacted. Our use of vendors also exposes us to the risk of a loss of intellectual property or of
conÑdential information or other harm. Financial or operational diÇculties of an outside vendor could also hurt our
operations if those diÇculties interfere with the vendor's ability to provide services to us.
Our risk management eÅorts may not eÅectively mitigate the risks we seek to manage.
We could incur substantial losses and our business operations could be disrupted if we are unable to eÅectively identify,
manage, monitor and mitigate operational risks, interest-rate and other market risks and credit risks related to our business.
We have devoted signiÑcant resources to develop an enterprise risk management framework establishing governance over
certain risks we face. However, our risk management policies, procedures and techniques may not be suÇcient to mitigate
the risks we have identiÑed or to appropriately identify additional risks to which we are subject. See ""MD&A Ì RISK
MANAGEMENT'' for a discussion of our approach to managing the risks we face.
Our ability to hire, train and retain qualiÑed employees aÅects our business and operations.
Our continued success depends, in large part, on our ability to hire and retain highly qualiÑed people. Our business is
complex and many of our positions require speciÑc skills. Undesirable voluntary employee turnover strains existing resources
and contributes to increased operational risk. Although voluntary employee turnover improved in 2006, if we experience
turnover rates at or above the level experienced in 2005 or are unable to attract, train and retain talented people, our business
and operations could be impaired or disrupted. Competition for highly qualiÑed personnel is intense and there can be no
assurances that we will retain our key personnel or that we will be successful in attracting, training or retaining other highly
qualiÑed personnel in the future. Furthermore, there is a risk that we may not have suÇcient personnel or personnel with
suÇcient training in key roles. See ""MD&A Ì RISK MANAGEMENT Ì Operational Risks'' for a description of the
impact of our staÇng and turnover.
Legal and Regulatory Risks
Developments aÅecting our legislative and regulatory environment could materially harm our business prospects or
competitive position.
Various developments or factors may aÅect our applicable legislative or regulatory environment, including any changes
or developments aÅecting our charter, aÅordable housing goals, or regulatory capital requirements (including the 30 percent
mandatory target capital surplus OFHEO imposed on us in January 2004); the interpretation of these requirements by our
regulators; the adequacy of internal systems, controls and processes related to these requirements; the exercise or assertion of
12 Freddie Mac