Freddie Mac 2008 Annual Report Download - page 121

obligation includes a reduction of $7.1 billion in the fair value of our guarantee obligation recorded on January 1, 2008, as a
result of our adoption of SFAS 157.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our business activities require that we maintain adequate liquidity to fund our operations, which may include the need
to make payments upon the maturity, redemption or repurchase of our debt securities; make payments of principal and
interest on our debt securities and on our PCs and Structured Securities; make net payments on derivative instruments; pay
dividends on our senior preferred stock; purchase mortgage-related securities and other investments; and purchase mortgage
loans. See “RISK MANAGEMENT AND DISCLOSURE COMMITMENTS” for a discussion of our agreement with FHFA
to maintain and periodically test a liquidity management and contingency plan. Pursuant to this agreement, FHFA
periodically assesses the size of our liquidity portfolio.
We fund our cash requirements primarily by issuing short-term and long-term debt. Other sources of cash include:
• receipts of principal and interest payments on securities or mortgage loans we hold;
• other cash flows from operating activities, including guarantee activities;
• borrowings against mortgage-related securities and other investment securities we hold; and
• sales of securities we hold.
As described below under “Actions of Treasury, the Federal Reserve and FHFA,” Treasury, the Federal Reserve and
FHFA have taken a number of actions that affect our cash requirements and ability to fund those requirements. The support
of Treasury and the Federal Reserve to date has enabled us to access debt funding on terms sufficient for our needs.
As discussed above, our dividend obligations on the senior preferred stock are substantial, and make it more likely that
we will face increasingly negative cash flows from operations. For more information, see “RISK FACTORS —
Conservatorship and Related Developments — Factors including credit losses from our mortgage guarantee activities have
had an increasingly negative impact on our cash flows from operations during 2007 and 2008. As we anticipate these trends
to continue for the foreseeable future, it is likely that the company will increasingly rely upon access to the public debt
markets as a source of funding for ongoing operations. Access to such public debt markets may not be available.”
We measure our cash position on a daily basis, netting uses of cash with sources of cash. We manage the net cash
position with the goal of providing debt funds to cover expected net cash outflows without adversely affecting overall
funding costs. Our approach to liquidity management has three components:
• we are required to maintain a net cash surplus for at least 21 days based on projected outflows and inflows;
• we maintain alternative sources of liquidity to allow normal operations without relying upon the issuance of unsecured
debt. The alternative sources of liquidity include potential sales from our cash and other investments portfolio and our
ability to borrow against our largely unencumbered agency mortgage-related investments portfolio through repurchase
transactions with Treasury under the Lending Agreement, as current market conditions make it difficult to find other
suitable counterparties for such transactions; and
• our liquidity management policy requires us to maintain a portfolio of liquid, marketable, non-mortgage-related
securities with maturities greater than 21 days or designated money market instruments of at least $20 billion. These
securities provide liquidity either through potential sales or our receipt of payments from the securities, including at
maturity.
We monitor compliance with these requirements on a daily basis. We periodically conduct tests of our ability to
implement our liquidity plans in response to hypothetical liquidity events. As discussed below under “Mortgage-Related
Investments Portfolio,” current market conditions limit the availability of the assets in our mortgage-related investments
portfolio as a significant source of funding. Consequently, our long-term liquidity contingency strategy currently is dependent
on use of the Lending Agreement, which expires on December 31, 2009.
We may require cash in order to fulfill our mortgage purchase commitments. Historically, we fulfilled our purchase
commitments related to our mortgage purchase flow business primarily by swap transactions, whereby our customers
exchange mortgage loans for PCs, rather than through cash outlays. However, it is at the discretion of the seller, subject to
limitations imposed by the contract governing the commitment, whether the purchase commitment is fulfilled by a swap
transaction or through the exchange of cash. Since mortgage interest rates declined late in the fourth quarter of 2008, there
has been an increase in refinance mortgage originations. A higher than historically experienced volume of these refinance
originations have been delivered to us for cash purchase rather than for swap transactions. We provide liquidity to our seller/
servicers through our cash purchase program. Loans purchased through the cash purchase program are typically sold to
investors through a cash auction of PCs, and, in the interim, are carried as mortgage loans on our consolidated balance
sheets. However, because of continuing market disruptions in the second half of 2008, demand for our cash auctions of PCs
118 Freddie Mac