Freddie Mac 2008 Annual Report Download - page 237

our core capital falls below our minimum capital requirement and pursuant to our request, the Secretary of the Treasury
exercises discretionary authority to purchase our obligations under Section 306(c) of our charter. Qualifying subordinated
debt will be discounted for the purposes of this commitment as it approaches maturity with one-fifth of the outstanding
amount excluded each year during the instrument’s last five years before maturity. When the remaining maturity is less than
one year, the instrument is entirely excluded. FHFA, as Conservator of Freddie Mac, has suspended the requirements in the
September 2005 agreement with respect to issuance, maintenance and reporting and disclosure of Freddie Mac subordinated
debt during the term of conservatorship and thereafter until directed otherwise.
Regulatory Capital Monitoring Framework
In a letter dated January 28, 2004, FHFA created a framework for monitoring our capital. The letter directed that we
maintain a 30% mandatory target capital surplus over our minimum capital requirement, subject to certain conditions and
variations; that we submit weekly reports concerning our capital levels; and that we obtain prior approval of certain capital
transactions. The mandatory target capital surplus was subsequently reduced to 20%.
FHFA, as Conservator of Freddie Mac, has announced that the mandatory target capital surplus will not be binding
during the term of conservatorship.
NOTE 11: STOCK-BASED COMPENSATION
Following the implementation of the conservatorship, we have suspended the operation of our ESPP, and are no longer
making grants under our 2004 Stock Compensation Plan, or 2004 Employee Plan, or our 1995 Directors’ Stock
Compensation Plan, as amended and restated, or Directors’ Plan. Under the Purchase Agreement, we cannot issue any new
options, rights to purchase, participations or other equity interests without Treasury’s prior approval. However, grants
outstanding as of the date of the Purchase Agreement remain in effect in accordance with their terms. Prior to the
implementation of the conservatorship, we made grants under three stock-based compensation plans: (a) the ESPP; (b) the
2004 Employee Plan; and (c) the Directors’ Plan. Prior to the stockholder approval of the 2004 Employee Plan, employee
stock-based compensation was awarded in accordance with the terms of the 1995 Stock Compensation Plan, or 1995
Employee Plan. Although grants are no longer made under the 1995 Employee Plan, we currently have awards outstanding
under this plan. We collectively refer to the 2004 Employee Plan and 1995 Employee Plan as the Employee Plans.
Common stock delivered under these plans may consist of authorized but previously unissued shares, treasury stock or
shares acquired in market transactions on behalf of the participants. During 2008, we granted restricted stock units as stock-
based awards. Such awards, discussed below, are generally forfeitable for at least one year after the grant date, with vesting
provisions contingent upon service requirements.
Stock Options
Stock options allow for the purchase of our common stock at an exercise price equal to the fair market value of our
common stock on the grant date. During 2006, the 2004 Employee Plan was amended to change the definition of fair market
value to the closing sales price of a share of common stock from the average of the high and low sales prices, effective for
all grants after December 6, 2006. Options generally may be exercised for a period of 10 years from the grant date, subject
to a vesting schedule commencing on the grant date.
Stock options that we previously granted included dividend equivalent rights. Depending on the terms of the grant, the
dividend equivalents may be paid when and as dividends on our common stock are declared. Alternatively, dividend
equivalents may be paid upon exercise or expiration of the stock option. Subsequent to November 30, 2005, dividend
equivalent rights were no longer granted in connection with awards of stock options to grantees to address Internal Revenue
Code Section 409A.
Restricted Stock Units
A restricted stock unit entitles the grantee to receive one share of common stock at a specified future date. Restricted
stock units do not have voting rights, but do have dividend equivalent rights, which are (a) paid to restricted stock unit
holders who are employees as and when dividends on common stock are declared or (b) accrued as additional restricted
stock units for non-employee members of our Board of Directors.
Restricted Stock
Restricted stock entitles participants to all the rights of a stockholder, including dividends, except that the shares
awarded are subject to a risk of forfeiture and may not be disposed of by the participant until the end of the restriction
period established at the time of grant.
Stock-Based Compensation Plans
The following is a description of each of our stock-based compensation plans under which grants were made prior to
our entry into conservatorship on September 6, 2008. After such date, we suspended operation of our ESPP and will no
longer make grants under the Employee Plans or Director’s Plan.
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