Freddie Mac 2008 Annual Report Download - page 236

If we were classified as critically undercapitalized, FHFA would have the authority to appoint a conservator or receiver
for us.
In addition, without regard for our capital classification, under the Reform Act, we are not permitted to make a capital
distribution if, after making the distribution, we would be undercapitalized, except the Director of FHFA may permit us to
repurchase shares if the repurchase is made in connection with the issuance of additional shares or obligations in at least an
equivalent amount and will reduce our financial obligations or otherwise improve our financial condition. Also without
regard to our capital classification, under Freddie Mac’s charter, we must obtain prior written approval of FHFA to make any
capital distribution that would decrease total capital to an amount less than the risk-based capital level or that would decrease
core capital to an amount less than the minimum capital level.
Performance Against Regulatory Capital Standards
Table 10.1 summarizes our minimum capital requirements and surpluses (deficits), as well as our stockholders’ equity
(deficit) position and net worth.
Table 10.1 — Stockholders’ Equity (Deficit), Net Worth and Capital
December 31, 2008 December 31, 2007
(in millions)
GAAP stockholders’ equity (deficit)
(1)
............................................... $(30,731) $26,724
GAAP net worth
(1)
............................................................. $(30,637) $26,900
Core capital
(2)(3)
.............................................................. $(13,174) $37,867
Less: Minimum capital requirement
(2)
................................................ 28,200 26,473
Minimum capital surplus (deficit)
(2)
............................................... $(41,374) $11,394
(1) Net worth represents the difference between our assets and liabilities under GAAP. Net worth is substantially the same as stockholders’ equity (deficit);
however, net worth also includes the minority interests that third parties own in our consolidated subsidiaries, which totaled $94 million and
$176 million at December 31, 2008 and December 31, 2007, respectively.
(2) Core capital and minimum capital figures for December 31, 2008 represent Freddie Mac estimates. FHFA is the authoritative source for our regulatory
capital.
(3) The liquidation preference of the senior preferred stock is not included in core capital as of December 31, 2008, because the senior preferred does not
meet the statutory definition of core capital given the cumulative dividends. The $1 billion decrease to additional-paid-in capital to record the initial
senior preferred stock issued to Treasury is reflected as a reduction to core capital as of December 31, 2008.
Following our entry into conservatorship, FHFA directed us to focus our risk and capital management on, among other
things, maintaining a positive balance of GAAP stockholders’ equity in order to reduce the likelihood that we will need to
make additional draws on the Purchase Agreement with Treasury, while returning to long-term profitability. The Purchase
Agreement provides that, if FHFA determines as of quarter end that our liabilities have exceeded our assets under GAAP,
Treasury will contribute funds to us in an amount equal to the difference between such liabilities and assets.
Under the Reform Act, FHFA must place us into receivership if FHFA determines in writing that our assets are less than
our obligations for a period of 60 days. FHFA has notified us that the measurement period for any mandatory receivership
determination with respect to our assets and obligations would commence no earlier than the SEC public filing deadline for
our quarterly or annual financial statements and would continue for 60 calendar days after that date. FHFA has also advised
us that, if, during that 60-day period, we receive funds from Treasury in an amount at least equal to the deficiency amount
under the Purchase Agreement, the Director of FHFA will not make a mandatory receivership determination. At
December 31, 2008 our liabilities exceeded our assets under GAAP by $30.6 billion while our stockholders’ equity (deficit)
totaled $(30.7) billion. As such, we must obtain funding from Treasury pursuant to its commitment under the Purchase
Agreement in order to avoid being placed into receivership by FHFA. On November 24, 2008, we received $13.8 billion
from Treasury under the Purchase Agreement. 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. As a result of these draws,
the liquidation preference on the senior preferred stock will increase from $1.0 billion as of September 8, 2008 to
$45.6 billion and the remaining funding available under Treasury’s announced commitment will decrease to approximately
$155.4 billion. We paid our first quarterly dividend of $172 million on the senior preferred stock on December 31, 2008 at
the direction of the Conservator.
Subordinated Debt Commitment
In October 2000, we announced our voluntary adoption of a series of commitments designed to enhance market
discipline, liquidity and capital. In September 2005, we entered into a written agreement with FHFA that updated those
commitments and set forth a process for implementing them. Under the terms of this agreement, we committed to issue
qualifying subordinated debt for public secondary market trading and rated by no fewer than two nationally recognized
statistical rating organizations in a quantity such that the sum of total capital plus the outstanding balance of qualifying
subordinated debt will equal or exceed the sum of 0.45% of our PCs and Structured Securities outstanding and 4% of our
on-balance sheet assets at the end of each quarter. Qualifying subordinated debt is defined as subordinated debt that contains
a deferral of interest payments for up to five years if our core capital falls below 125% of our critical capital requirement or
233 Freddie Mac