Freddie Mac 2008 Annual Report Download - page 21

dividends and commitment fees not paid in cash. To the extent we draw on Treasury’s funding commitment, the liquidation
preference of the senior preferred stock will be increased by the amount of funds we receive. The senior preferred stock is
senior in liquidation preference to our common stock and all other series of preferred stock. In addition, beginning on
March 31, 2010, we are required to pay a quarterly commitment fee to Treasury, which will accrue from January 1, 2010.
We are required to pay this fee each quarter for as long as the Purchase Agreement is in effect. The amount of this fee has
not yet been determined.
On November 24, 2008, we received $13.8 billion from Treasury under its commitment and on December 31, 2008 we
paid dividends of $172 million in cash on the senior preferred stock to Treasury at the direction of the Conservator. The
Director of FHFA has submitted a draw request to Treasury under the Purchase Agreement in the amount of $30.8 billion,
which we expect to receive in March 2009. When this draw is received:
• the aggregate liquidation preference of the senior preferred stock will increase from $1.0 billion as of September 8,
2008 to $45.6 billion; and
• Treasury, the holder of the senior preferred stock, will be entitled to annual cash dividends of $4.6 billion, as
calculated based on the aggregate liquidation preference of $45.6 billion.
Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited
and we may not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior
preferred stock and our related dividend obligations could increase further as a result of additional draws under the Purchase
Agreement or any dividends or quarterly commitment fees payable under the Purchase Agreement that are not paid in cash.
The amounts payable for dividends on the senior preferred stock are substantial and will have an adverse impact on our
financial position and net worth and, to the extent they are paid in cash, will increase the need for additional funding under
the Purchase Agreement. In addition, the continuing deterioration in the financial and housing markets and further GAAP net
losses will make it more likely that we will continue to have additional large draws under the Purchase Agreement in future
periods, which will make it significantly more difficult to service senior preferred dividends in cash in the future. As a result
of additional draws and other factors, our cash flow from operations and earnings will likely be negative for the foreseeable
future, there is significant uncertainty as to our future capital structure and long-term financial sustainability, and there are
likely to be significant changes to our current capital structure and business model beyond the near-term that we expect to be
decided by Congress and the Executive Branch.
The Purchase Agreement includes significant restrictions on our ability to manage our business, including limiting the
amount of indebtedness we can incur and capping the size of our mortgage-related investments portfolio as of December 31,
2009. See “MD&A — CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments Portfolio” and
“MD&A — OUR PORTFOLIOS” for a description and composition of our portfolios. Beginning in 2010, we must decrease
the size of our mortgage-related investments portfolio at the rate of 10% per year until it reaches $250 billion. While the
senior preferred stock is outstanding, we are prohibited from paying dividends (other than on the senior preferred stock) or
issuing equity securities without Treasury’s consent.
The Purchase Agreement has an indefinite term and can terminate only in limited circumstances, which do not include
the end of the conservatorship. The Purchase Agreement therefore could continue after the conservatorship ends. Treasury
has the right to exercise the warrant, in whole or in part, at any time on or before September 7, 2028. We provide more
detail about the provisions of the Purchase Agreement, the senior preferred stock and the warrant, the limited circumstances
under which those agreements terminate, and the limitations they place on our ability to manage our business under
“Treasury Agreements” below. See “RISK FACTORS” for a discussion of how the restrictions under the Purchase Agreement
may have a material adverse effect on our business.
Liquidity and the Treasury Lending Agreement
In the second half of 2008, we experienced less demand for our debt securities as reflected in wider spreads on our term
and callable debt. This reflected overall deterioration in our access to unsecured medium and long-term debt markets. There
were many factors contributing to the reduced demand for our debt securities in the capital markets, including continued
severe market disruptions, market concerns about our capital position and the future of our business (including its future
profitability, future structure, regulatory actions and agency status) and the extent of U.S. government support for our debt
securities. In addition, various U.S. government programs were still being digested by market participants, which created
uncertainty as to whether competing obligations of other companies were more attractive investments than our debt
securities.
As our ability to issue long-term debt has been limited, we have relied increasingly on short-term debt to fund our
purchases of mortgage assets and to refinance maturing debt. As a result, we have been required to refinance our debt on a
more frequent basis, exposing us to an increased risk of insufficient demand, increasing interest rates and adverse credit
market conditions. On November 25, 2008, the Federal Reserve announced that it would purchase up to $100 billion in
direct obligations of us, Fannie Mae, and the FHLBs, and up to $500 billion of mortgage-related securities issued by us,
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