Freddie Mac 2008 Annual Report Download - page 127

mortgage-related securities primarily backed by subprime loans, Alt-A and other loans, and MTA loans where we have
already realized other-than-temporary impairments, we do not currently expect the cash flows from these securities to
negatively impact our liquidity. See “CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments
Portfolio” for more information.
On September 19, 2008, the Director of FHFA announced that FHFA had directed us to provide additional funding to
the mortgage markets through the purchase of mortgage-related securities. This directive, however, does not supersede the
restrictions on the size of our mortgage-related investments portfolio under the Purchase Agreement. Under the Purchase
Agreement and FHFA regulation, our mortgage-related investments portfolio as of December 31, 2009 may not exceed
$900 billion, and must decline by 10% per year thereafter until it reaches $250 billion.
Cash Flows
Our cash and cash equivalents increased $36.8 billion to $45.3 billion during 2008. Beginning in the second quarter of
2008, all investments in commercial paper with maturities of less than three months were entered into for working capital
purposes. Consequently, commercial paper with maturities of less than three months was classified as cash and cash
equivalents rather than investments. Cash flows used for operating activities during 2008 were $10.5 billion, which primarily
reflected a reduction in cash as a result of increases in purchases of held-for-sale mortgage loans. Cash flows used for
investing activities during 2008 were $71.1 billion, primarily resulting from purchases of trading securities and available-for-
sale securities, partially offset by proceeds from maturities of available-for-sale securities and sales of trading securities.
Cash flows provided by financing activities in 2008 were $118.3 billion, largely attributable to proceeds from the issuance of
debt securities, net of repayments.
SFAS 159 requires the classification of trading securities cash flows based on the purpose for which the securities were
acquired. Upon adoption of SFAS 159, effective January 1, 2008, we classified our trading securities cash flows as investing
activities because we intend to hold these securities for investment purposes. Prior to our adoption of SFAS 159, we
classified cash flows on all trading securities as operating activities. As a result, the operating and investing activities on our
consolidated statements of cash flows have been impacted by this change.
Our cash and cash equivalents decreased $2.8 billion to $8.6 billion during 2007. Cash flows used for operating
activities in 2007 were $7.5 billion, which reflected a reduction in cash primarily from a decrease in liabilities to PC
investors as a result of a change in our PC issuance process to use of securitization trusts. Net cash used was primarily
provided by net interest income, management and guarantee fees and changes in other operating assets and liabilities. Cash
flows provided by investing activities in 2007 were $9.7 billion, primarily due to a net increase in cash flows as we reduced
our balance of federal funds sold and eurodollars. This was partially offset by an increase in cash used to purchase mortgage
loans under financial guarantees as a result of increasing delinquencies. Cash flows used for financing activities in 2007 were
$5.0 billion and resulted from a decrease in debt securities, net, preferred and common stock repurchases and dividends paid.
Cash used was partially offset by proceeds from the issuance of preferred stock.
Our cash and cash equivalents increased $0.9 billion to $11.4 billion during 2006. Cash flows provided by operating
activities in 2006 were $9.0 billion, which primarily reflected cash flows provided by net interest income, management and
guarantee fees and changes in other operating assets and liabilities, partially offset by non-interest expenses. Cash flows used
for investing activities in 2006 were $5.2 billion, primarily resulting from purchases of held-for-investment mortgages and
available-for-sale securities, as well as a net decrease in cash flows from federal funds sold and securities purchased under
agreements to resell, partially offset by proceeds from sales and maturities of available-for-sale securities and repayments of
held-for-investment mortgages. Cash flows used for financing activities in 2006 were $3.0 billion and were primarily due to
repayments of debt securities, repurchases of common stock, payment of cash dividends on preferred stock and common
stock, and payments of housing tax credit partnerships notes payable, partially offset by proceeds from issuance of debt
securities.
Capital Adequacy
Our entry into conservatorship resulted in significant changes to the assessment of our capital adequacy and our
management of capital. On October 9, 2008, FHFA announced that it was suspending capital classification of us during
conservatorship in light of the Purchase Agreement. Concurrent with this announcement, FHFA classified us as
undercapitalized as of June 30, 2008 based on discretionary authority provided by statute. FHFA noted that although our
capital calculations as of June 30, 2008 reflected that we met the statutory and FHFA-directed requirements for capital, the
continued market downturn in July and August of 2008 raised significant questions about the sufficiency of our capital.
Factors cited by FHFA leading to the downgrade in our capital classification and the need for conservatorship included
(a) our accelerated safety and soundness weaknesses, especially with regard to our credit risk, earnings outlook and
capitalization, (b) continued and substantial deterioration in equity, debt and mortgage-related securities market conditions,
(c) our current and projected financial performance, (d) our inability to raise capital or issue debt according to normal
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