Freddie Mac 2008 Annual Report Download - page 82

Table 18 — Gains (Losses) on Investment Activity
2008 2007 2006
Year Ended December 31,
(in millions)
Gains (losses) on trading securities
(1)(2)
..................................................... $ 955 $506 $(106)
Gains on sale of mortgage loans
(3)
........................................................ 117 14 90
Gains (losses) on sale of available-for-sale securities ............................................ 546 232 (140)
Impairments on available-for-sale securities
(2)
................................................. (17,682) (365) (297)
Lower-of-cost-or-fair-value adjustments . .................................................... (30) (93) (20)
Gains (losses) on mortgage loans elected at fair value ........................................... (14) — —
Total gains (losses) on investment activity . . . .............................................. $(16,108) $ 294 $(473)
(1) Includes mark-to-fair value adjustments recorded in accordance with Emerging Issues Task Force, or EITF, 99-20, “Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets” on
securities classified as trading of $(2.2) billion, $(34) million and $(107) million for 2008, 2007 and 2006, respectively.
(2) Prior period amounts have been revised to conform to the current year presentation.
(3) Represents gains on mortgage loans sold in connection with securitization transactions.
Gains (Losses) on Trading Securities
We recognized net gains on trading securities of $955 million for 2008, as compared to net gains of $506 million for
2007. On January 1, 2008, we implemented fair value option accounting pursuant to our adoption of SFAS 159 and
transferred approximately $87 billion in securities, primarily ARMs and fixed-rate PCs, from available-for-sale securities to
trading securities, which significantly increased the balance of our securities classified as trading. The unpaid principal
balance of our securities classified as trading was approximately $184 billion at December 31, 2008 compared to
approximately $12 billion at December 31, 2007 as we increased our purchases of agency mortgage-related securities
classified as trading during 2008. The increased balance in our trading portfolio when compared to the balance at
December 31, 2007, combined with lower interest rates, contributed to the gains of $3.2 billion on these trading securities for
2008. Partially offsetting these gains were mark-to-fair value adjustments of $(2.2) billion recorded during 2008 in
accordance with EITF 99-20 on interest-only securities classified as trading principally as a result of declining interest rates
during the fourth quarter. In addition, during 2008, we sold agency securities classified as trading with unpaid principal
balances of $95 billion, which generated realized losses of $481 million. We realized the majority of these losses on sales
that occurred prior to our entry into conservatorship during the third quarter of 2008 in an effort to meet the mandatory
target capital surplus requirement then in effect.
In 2007, the overall decrease in long-term interest rates resulted in gains related to our agency securities classified as
trading.
In 2006, the increase in long-term interest rates resulted in gains related to our interest-only mortgage related securities
classified as trading. These gains were more than offset by losses on other mortgage-related securities classified as trading as
a result of the rise in interest rates.
Gains (Losses) on Sale of Available-For-Sale Securities
Net gains on the sale of available-for-sale securities increased for 2008, as compared to 2007. During 2008, we entered
into structured transactions and sales of seasoned securities with unpaid principal balances of $36 billion, primarily
consisting of agency mortgage-related securities, which generated a net gain of $546 million. These sales occurred
principally during the first quarter and prior to our entry into conservatorship during the third quarter of 2008, when market
conditions were favorable and we sold assets in an effort to meet the mandatory target capital surplus requirement then in
effect. We were not required to sell these securities.
We realized net gains on the sale of available-for-sale securities of $232 million for 2007, compared to net losses of
$140 million for 2006. During the fourth quarter of 2007, we sold approximately $27.2 billion of PCs and Structured
Securities, classified as available-for-sale, for capital management purposes. These sales generated gross gains of
approximately $216 million and gross losses of $30 million included in gains (losses) on sale of available-for-sale securities.
The securities sold at a loss had an unpaid principal balance of $6 billion. These sales were part of a broader set of strategic
management decisions made in the fourth quarter of 2007 to help maintain our minimum capital requirements in the face of
the unanticipated extraordinary market conditions that existed in the latter half of 2007. In an effort to improve our capital
position in light of these conditions, we strategically selected blocks of securities to sell, the majority of which were in a
gain position.
In 2006, losses on sales of available-for-sale securities were primarily driven by resecuritization activity, partially offset
by net gains of $188 million related to the sale of certain commercial mortgage-backed securities, or CMBS, as discussed
below.
79 Freddie Mac