Freddie Mac 2008 Annual Report Download - page 83

Impairments on Available-For-Sale Securities
During 2008 and 2007, we recorded other-than-temporary impairments related to investments in available-for-sale
securities of $17.7 billion and $365 million, respectively. Of the other-than-temporary impairments recognized during 2008,
$16.6 billion related primarily to non-agency securities backed by subprime, Alt-A and other loans and MTA loans. See
“CONSOLIDATED BALANCE SHEETS ANALYSIS — Mortgage-Related Investments Portfolio — Other-Than-Temporary
Impairments” for additional information regarding the other-than-temporary impairments on mortgage-related securities in
2008. The remaining $1.1 billion related to other-than-temporary impairments of our available-for-sale non-mortgage-related
securities during 2008 where we did not have the intent to hold to a forecasted recovery. The decision to impair these
securities is consistent with our consideration of securities in the cash and other investments portfolio as a contingent source
of liquidity.
Security impairments in 2007 were primarily related to other-than-temporary impairments recognized during the second
quarter of 2007 on agency securities that we sold in the third quarter of 2007 and thus did not have the intent to hold until
the loss would be recovered.
For 2006, other-than-temporary security impairments included $236 million of interest-rate related impairments related
to mortgage-related securities where we did not have the intent to hold the security until the loss would be recovered. Other-
than-temporary security impairments during 2006 also included $61 million related to certain CMBSs backed by cash flows
from mixed pools of multifamily and non-residential commercial mortgages which were sold. HUD had determined that
these mixed-pool investments were not authorized under our charter and FHFA subsequently directed us to divest these
investments.
Gains (Losses) on Foreign-Currency Denominated Debt Recorded at Fair Value
We elected the fair value option for our foreign-currency denominated debt effective January 1, 2008 in connection with
our adoption of SFAS 159. Accordingly, foreign-currency exposure is now a component of gains (losses) on foreign-currency
denominated debt recorded at fair value. Prior to that date, translation gains and losses on our foreign-currency denominated
debt were reported in foreign-currency gains (losses), net in our consolidated statements of operations. We manage the
foreign-currency exposure associated with our foreign-currency denominated debt through the use of derivatives. For 2008,
we recognized fair value gains of $406 million on our foreign-currency denominated debt primarily due to the U.S. dollar
strengthening relative to the Euro, partially offset by a decline in interest rates. See “Derivative Gains (Losses)” for
additional information about how we mitigate changes in the fair value of our foreign-currency denominated debt by using
derivatives. See “Foreign-Currency Gains (Losses), Net” and “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES” to our consolidated financial statements for additional information about our adoption of SFAS 159.
Gains (Losses) on Debt Retirement
We repurchase or call our outstanding debt securities from time to time to help support the liquidity and predictability
of the market for our debt securities and to manage the mix of liabilities funding our assets. When we repurchase or call
outstanding debt securities, we recognize a gain or loss related to the difference between the amount paid to redeem the debt
security and the carrying value, including any remaining unamortized deferred items (e.g., premiums, discounts, issuance
costs and hedging-related basis adjustments), in earnings in the period of extinguishment as a component of gains (losses) on
debt retirement.
Contemporaneous transfers of cash between us and a creditor in connection with the issuance of a new debt security and
satisfaction of an existing debt security are accounted for as either an extinguishment of the existing debt security or a
modification, or debt exchange, of an existing debt security. If the debt securities have substantially different terms, the
transaction is accounted for as an extinguishment of the existing debt security with recognition of any gains or losses in
earnings in gains (losses) on debt retirement, the issuance of a new debt security is recorded at fair value, fees paid to the
creditor are expensed, and fees paid to third parties are deferred and amortized into interest expense over the life of the new
debt obligation using the effective interest method. If the terms of the existing debt security and the new debt security are
not substantially different, the transaction is accounted for as a debt exchange, fees paid to the creditor are deferred and
amortized over the life of the modified debt security using the effective interest method, and fees paid to third parties are
expensed as incurred. In a debt exchange, the following are each considered to be a basis adjustment on the new debt
security and are amortized as an adjustment of interest expense over the remaining term of the new debt security: (a) the fees
associated with the new debt security and any existing unamortized premium or discount; (b) concession fees; and (c) hedge
gains and losses on the existing debt security.
Gains (losses) on debt retirement were $209 million, $345 million and $466 million during 2008, 2007 and 2006,
respectively. During 2008, we recognized gains due to the increased level of call activity, primarily involving our debt with
coupon levels that increase at pre-determined intervals, which led to gains upon retirement and write-offs of previously
recorded interest expense.
80 Freddie Mac