Freddie Mac 2008 Annual Report Download - page 259

Table 17.1 — Assets and Liabilities Measured at Fair Value on a Recurring Basis
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Netting
Adjustment
(1)
Total
Fair Value at December 31, 2008
(in millions)
Assets:
Investments in securities:
Available-for-sale, at fair value
Mortgage-related securities ............................ $ — $344,364 $105,740 $ — $450,104
Non-mortgage-related securities . . . ...................... — 8,794 — — 8,794
Subtotal available-for-sale, at fair value .................. — 353,158 105,740 — 458,898
Trading, at fair value . . . ...............................
Mortgage-related securities ............................ — 188,161 2,200 — 190,361
Total investments in securities . ...................... — 541,319 107,940 — 649,259
Mortgage loans:
Held-for-sale, at fair value ............................... — — 401 — 401
Derivative assets, net .................................... 233 49,567 137 (48,982) 955
Guarantee asset, at fair value .............................. — — 4,847 — 4,847
Total assets carried at fair value on a recurring basis ........ $ 233 $590,886 $113,325 $(48,982) $655,462
Liabilities:
Debt securities denominated in foreign currencies . . . . . ........... $ — $ 13,378 $ — $ — $ 13,378
Derivative liabilities, net . . . ............................... 1,150 52,577 37 (51,487) 2,277
Total liabilities carried at fair value on a recurring basis ...... $1,150 $ 65,955 $ 37 $(51,487) $ 15,655
(1) Represents counterparty netting, cash collateral netting, net trade/settle receivable or payable and net derivative interest receivable or payable. The net
cash collateral posted and net trade/settle payable were $1.5 billion and $— million, respectively, at December 31, 2008. The net interest receivableof
derivative assets and derivative liabilities was approximately $1.1 billion at December 31, 2008, which was mainly related to interest rate swaps that we
have entered into.
Fair Value Measurements (Level 3)
Level 3 measurements consist of assets and liabilities that are supported by little or no market activity where observable
inputs are not available. The fair value of these assets and liabilities is measured using significant inputs that are considered
unobservable. Unobservable inputs reflect assumptions based on the best information available under the circumstances. We
use valuation techniques that maximize the use of observable inputs, where available, and minimize the use of unobservable
inputs.
Our Level 3 items mainly represent non-agency residential mortgage-related securities and our guarantee asset. During
2008, the market for non-agency securities backed by subprime, Alt-A and other and MTA mortgage loans became
significantly less liquid, which resulted in lower transaction volumes, wider credit spreads and less transparency. We
transferred our holdings of these securities into the Level 3 category as inputs that were significant to their valuation became
limited or unavailable. We concluded that the prices on these securities received from pricing services and dealers were
reflective of significant unobservable inputs. Our guarantee asset is valued either through obtaining dealer quotes on similar
securities or through an expected cash flow approach. Because of the broad range of discounts for liquidity applied by
dealers to these similar securities and because the expected cash flow valuation approach uses significant unobservable
inputs, we classified the guarantee asset as Level 3. See “NOTE 3: RETAINED INTERESTS IN MORTGAGE-RELATED
SECURITIZATIONS” for more information about the valuation of our guarantee asset.
256 Freddie Mac