Freddie Mac 2008 Annual Report Download - page 40

• establishment of a valuation allowance for our remaining deferred tax asset; and
• changes in business practices resulting from legislative and regulatory developments, such as the enactment of
legislation providing bankruptcy judges with the authority to revise the terms of a mortgage, including the principal
amount.
To the extent we are required to make additional draws under the Purchase Agreement, our dividend obligation on the
senior preferred stock would further increase. As a result of these expected losses 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 capital structure
and business model beyond the near-term that we expect to be decided by Congress and the Executive Branch.
Our obligations under the senior preferred stock will adversely affect our future financial condition.
We face substantial dividend obligations on our senior preferred stock due to the draws that have been made or
requested on our behalf by FHFA, which total $44.6 billion to date. Following the $30.8 billion draw under the Purchase
Agreement, which we expect to receive in March 2009, our annual dividend obligation will be $4.6 billion, which is in
excess of our annual net income in eight of the ten prior fiscal years. Because senior preferred dividends are cumulative and
we are limited in our ability to redeem the senior preferred stock, our dividend obligation to Treasury will continue
indefinitely, and there is no assurance that we will be able to pay that obligation in any future period. In addition, beginning
in 2010, we are obligated to pay a quarterly commitment fee to Treasury in exchange for its continued funding commitment
under the Purchase Agreement. This fee has not yet been established and could be substantial. The dividend obligation,
combined with potentially substantial commitment fees payable to Treasury and limited flexibility to pay down capital draws,
will have a significant adverse impact on our future financial condition and net worth, could substantially delay our return to
long-term profitability, or make long-term profitability unlikely.
Dividends on the senior preferred stock issued under the Purchase Agreement accrue at a rate of 10% per year or 12%
per year in any quarter in which dividends are not paid in cash until all accrued dividends are paid in cash. Therefore, if we
are unable to pay the anticipated future dividends in cash, we could face a continual escalation in our dividend obligation. In
addition, the substantial cash dividend obligation may increase the risk that we may face increasingly negative cash flows
from operations.
Treasury’s funding commitment may not be sufficient to keep us in a solvent condition.
Under the Purchase Agreement, Treasury has made a commitment to provide up to $100 billion in funding as needed to
help us maintain a positive net worth, and on February 18, 2009, Treasury announced that it is increasing its commitment
from $100 billion to $200 billion. As of the filing of this annual report on Form 10-K, the Purchase Agreement has not been
amended to reflect the increase in Treasury’s commitment. In November 2008, we received an initial draw of $13.8 billion
under the Purchase Agreement, and the Director of FHFA has submitted a second draw request to Treasury under the
Purchase Agreement in the amount of $30.8 billion, which we expect to receive in March 2009. The amount of Treasury’s
funding commitment will continue to be reduced by any amounts we receive under the commitment for future periods.
If we continue to experience substantial losses in future periods or to the extent that we experience a liquidity crisis that
prevents us from accessing the unsecured debt markets, this commitment may not be sufficient to keep us in solvent
condition or from being placed into receivership. Thus, the announced increase in the commitment to $200 billion reduces,
but does not eliminate, this risk.
Factors including credit losses from our mortgage guarantee activities have had an increasingly negative impact on our
cash flows from operations during 2007 and 2008. As we anticipate these trends to continue for the foreseeable future, it
is likely that the company will increasingly rely upon access to the public debt markets as a source of funding for ongoing
operations. Access to such public debt markets may not be available.
We expect cash flows from operations to experience continued negative pressure in the near future, primarily as a result
of credit losses in excess of the projected revenues generated from our investment and mortgage guarantee activities.
It is also possible that substantial and increasing dividend obligations on our senior preferred stock could contribute to
negative cash flows, if the company makes these dividend payments in cash. If we do not make these dividend payments in
cash, the amount due increases the aggregate liquidation preference of the senior preferred stock.
If the negative cash flows from operations exceed funding availability in the public debt markets, the alternative sources
of cash available to us under our liquidity management and contingency plan, such as selling securities from our cash and
other investments portfolio or borrowing against securities in our mortgage-related investments portfolio, may be insufficient
to meet our future cash needs. In such event, the Lending Agreement (until its expiration on December 31, 2009) and
Purchase Agreement may provide additional sources of cash.
37 Freddie Mac