Freddie Mac 2008 Annual Report Download - page 241

where allowable by a master netting agreement. Derivatives in a net asset position are reported as derivative assets, net.
Similarly, derivatives in a net liability position are reported as derivative liabilities, net. Cash collateral we obtained from
counterparties to derivative contracts that has been offset against derivative assets, net at December 31, 2008 and
December 31, 2007 was $4.3 billion and $6.5 billion, respectively. Cash collateral we posted to counterparties to derivative
contracts that has been offset against derivative liabilities, net at December 31, 2008 and December 31, 2007 was $5.8 billion
and $344 million, respectively.
At December 31, 2008 and December 31, 2007, there were no amounts of cash collateral that were not offset against
derivative assets, net or derivative liabilities, net, as applicable. See “NOTE 18: CONCENTRATION OF CREDIT AND
OTHER RISKS” for further information related to our derivative counterparties.
As shown in Table 12.1, the total AOCI, net of taxes, related to cash flow hedge relationships was a loss of $3.7 billion
at December 31, 2008, composed of deferred net losses on closed cash flow hedges. In addition, due to our establishment of
a valuation allowance for our net deferred tax assets during 2008, net deferred losses of $472 million on our cash flow
hedges closed during 2008 were not adjusted for tax effects in our AOCI balance. Closed cash flow hedges involve
derivatives that have been terminated or are no longer designated as cash flow hedges. Fluctuations in prevailing market
interest rates have no impact on the deferred portion of AOCI relating to losses on closed cash flow hedges.
Over the 12 months beginning January 1, 2009, we estimate that approximately $774 million of deferred losses in
AOCI, net of taxes, will be reclassified into earnings. The maximum remaining length of time over which we have hedged
the exposure related to the variability in future cash flows on forecasted transactions, primarily interest payments on
forecasted debt issuances, is 25 years. However, over 70% and 90% of the AOCI, net of taxes, balance relating to closed
cash flow hedges at December 31, 2008 is linked to forecasted transactions occurring in the next five and ten years,
respectively. The occurrence of forecasted transactions may be satisfied by either periodic issuances of short-term debt over
the required time period or longer-term debt, such as Reference Notes˛securities.
Table 12.1 presents the changes in AOCI, net of taxes, related to derivatives designated as cash flow hedges. Net change
in fair value related to cash flow hedging activities, net of tax, represents the net change in the fair value of the derivatives
that were designated as cash flow hedges, after the effects of our federal statutory tax rate of 35% for cash flow hedges
closed prior to 2008 and a tax rate of 0% for cash flow hedges closed during 2008, to the extent the hedges were effective.
Net reclassifications of losses to earnings, net of tax, represents the AOCI amount that was recognized in earnings as the
originally hedged forecasted transactions affected earnings, unless it was deemed probable that the forecasted transaction
would not occur. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with
the hedge related to the forecasted transaction would be reclassified into earnings immediately. For further information on
our net deferred tax assets valuation allowance see “NOTE 14: INCOME TAXES.”
Table 12.1 — AOCI, Net of Taxes, Related to Cash Flow Hedge Relationships
2008 2007 2006
Year Ended December 31,
(in millions)
Beginning balance
(1)
................................................................ $(4,059) $(5,032) $(6,286)
Adjustment to initially apply SFAS 159
(2)
................................................ 4 — —
Net change in fair value related to cash flow hedging activities, net of tax
(3)
........................ (522) (30) (8)
Net reclassifications of losses to earnings, net of tax
(4)
....................................... 899 1,003 1,262
Ending balance
(1)
.................................................................. $(3,678) $(4,059) $(5,032)
(1) Represents the effective portion of the fair value of open derivative contracts (i.e., net unrealized gains and losses) and net deferred gains and losses on
closed (i.e., terminated or redesignated) cash flow hedges.
(2) Net of tax benefit of $— for the year ended December 31, 2008.
(3) Net of tax benefit of $25 million, $16 million, and $5 million for years ended December 31, 2008, 2007 and 2006, respectively.
(4) Net of tax benefit of $476 million, $540 million and $680 million for years ended December 31, 2008, 2007 and 2006, respectively.
Table 12.2 summarizes hedge ineffectiveness recognized related to our hedge accounting categories.
Table 12.2 — Hedge Accounting Categories Information
2008 2007 2006
Year Ended
December 31,
(in millions)
Fair value hedges
Hedge ineffectiveness recognized in other income — pre-tax
(1)
.......................................... $— $— $ 2
Cash flow hedges
Hedge ineffectiveness recognized in other income — pre-tax
(1)
.......................................... (16) — —
(1) No amounts have been excluded from the assessment of effectiveness.
238 Freddie Mac