Freddie Mac 2008 Annual Report Download - page 71

$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 aggregate 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 expect to make additional draws on Treasury’s funding commitment in the
future. The size of such draws will be determined by a variety of factors, including whether market conditions continue to
deteriorate.
The senior preferred stock accrues quarterly cumulative dividends 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 have been paid in cash. We paid our first quarterly
dividend of $172 million in cash on the senior preferred stock on December 31, 2008 at the direction of our Conservator.
Following receipt of our pending draw, Treasury will be entitled to annual cash dividends of $4.6 billion, as calculated based
on the aggregate liquidation preference of $45.6 billion. If we make additional draws under the Purchase Agreement, this
would further increase our dividend obligation.
This substantial ongoing dividend obligation, combined with potentially substantial commitment fees payable to
Treasury starting in 2010 and limited flexibility to pay down draws under the Purchase Agreement, will have an adverse
impact on our future financial position and net worth. For additional information concerning the potential impact of the
Purchase Agreement, including taking additional large draws, see “RISK FACTORS.” For additional information on our
capital management and capital requirements, see “LIQUIDITY AND CAPITAL RESOURCES — Capital Adequacy” and
“NOTE 10: REGULATORY CAPITAL” to our consolidated financial statements.
The Purchase Agreement places several restrictions on our business activities, which, in turn, affect our management of
capital. For instance, our mortgage-related investments portfolio may not exceed $900 billion as of December 31, 2009 and
must then decline by 10% per year until it reaches $250 billion. We are also unable to issue capital stock of any kind
without Treasury’s prior approval, other than in connection with the common stock warrant issued to Treasury under the
Purchase Agreement or binding agreements in effect on the date of the Purchase Agreement. In addition, on September 7,
2008, the Director of FHFA announced the elimination of dividends on our common and preferred stock, excluding the
senior preferred stock. See “BUSINESS — Conservatorship and Related Developments” for additional information regarding
the Purchase Agreement and the senior preferred stock.
A variety of factors could materially affect the level and volatility of our GAAP stockholders’ equity (deficit) in future
periods and the amount of additional draws we are required to take under the Purchase Agreement. Key factors include
continued deterioration in the housing market, which could increase credit expenses and cause additional other-than-
temporary impairments of our non-agency mortgage-related securities; the pursuit of policy-related objectives that may
adversely impact our financial results; adverse changes in interest rates, the yield curve, implied volatility or mortgage OAS,
which could increase realized and unrealized mark-to-fair value losses recorded in earnings or AOCI; dividend obligations on
the senior preferred stock; our inability to access the public debt markets on terms sufficient for our needs, absent support
from Treasury and the Federal Reserve; establishment of a valuation allowance for our remaining deferred tax asset; changes
in accounting practices or standards, including the initial implementation of proposed amendments to SFAS 140 and
FIN 46(R); potential accounting consequences of our implementation of HASP; or 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. At December 31, 2008, our remaining deferred
tax asset, which could be subject to a valuation allowance in future periods, totaled $15.4 billion. As a result of the factors
described above, it is difficult for us to maintain a positive level of stockholders’ equity (deficit).
Liquidity
In the second half of 2008, we experienced less demand for our debt securities, as reflected in wider spreads on our
term and callable debt. This reflected overall deterioration in our access to unsecured medium and long term debt markets to
fund our purchases of mortgage assets and to refinance maturing debt. As a result, we have been required to refinance our
debt on a more frequent basis, exposing us to an increased risk of insufficient demand and adverse credit market conditions.
We use pay-fixed swaps to synthetically create the substantive economic equivalent of various debt funding structures. Thus,
if our access to the derivative markets were disrupted, our business results would be adversely affected. The use of these
derivatives also exposes us to additional counterparty credit risk. This funding strategy may increase the volatility of our
GAAP results through mark-to-fair value impacts on our pay-fixed swaps and other derivatives. However, the Federal
Reserve has been an active purchaser of our long-term debt under its purchase program as discussed below and spreads on
our debt and access to the debt markets have improved in early 2009 as a result of this activity. See “LIQUIDITY AND
CAPITAL RESOURCES — Liquidity” for more information on our debt funding activities and risks posed by our current
market challenges and “RISK FACTORS” for a discussion of the risks to our business posed by our reliance on the issuance
of debt to fund our operations.
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