Freddie Mac 2008 Annual Report Download - page 88

consists of certain unallocated corporate items, such as costs associated with remediating our internal controls and near-term
restructuring costs, costs related to the resolution of certain legal matters and certain income tax items. We manage and
evaluate performance of the segments and All Other using a Segment Earnings approach, subject to the conduct of our
business under the direction of the Conservator. We expect our pursuit of public policy objectives at the direction of the
Conservator will, in many cases, have a negative impact on the financial results of our segments.
In managing our business, we present the operating performance of our segments using Segment Earnings. Segment
Earnings differs significantly from, and should not be used as a substitute for, net income (loss) as determined in accordance
with GAAP. There are important limitations to using Segment Earnings as a measure of our financial performance. Among
them, the need to obtain funding under the Purchase Agreement is based on our GAAP results, as are our regulatory capital
requirements (which are suspended during conservatorship). Segment Earnings adjusts for the effects of certain gains and
losses and mark-to-fair value items, which, depending on market circumstances, can significantly affect, positively or
negatively, our GAAP results and which, in recent periods, have contributed to our significant GAAP net losses. GAAP net
losses will adversely impact our GAAP stockholders’ equity (deficit), as well as our need for funding under the Purchase
Agreement, regardless of results reflected in Segment Earnings. Also, our definition of Segment Earnings may differ from
similar measures used by other companies. However, we believe that the presentation of Segment Earnings highlights the
results from ongoing operations and the underlying results of the segments in a manner that is useful to the way we manage
and evaluate the performance of our business.
Segment Earnings presents our results on an accrual basis as the cash flows from our segments are earned over time.
The objective of Segment Earnings is to present our results in a manner more consistent with our business models. The
business model for our investment activity is one where we generally buy and hold our investments in mortgage-related
assets for the long term, fund our investments with debt and use derivatives to minimize interest rate risk. The business
model for our credit guarantee activity is one where we are a long-term guarantor in the conforming mortgage markets,
manage credit risk and generate guarantee and credit fees, net of incurred credit losses. We believe it is meaningful to
measure the performance of our investment and guarantee businesses using long-term returns, not short-term value. As a
result of these business models, we believe that this accrual-based metric is a meaningful way to present our results as actual
cash flows are realized, net of credit losses and impairments. We believe Segment Earnings provides us with a view of our
financial results that is more consistent with our business objectives and helps us better evaluate the performance of our
business, both from period-to-period and over the longer term.
Segment Earnings is calculated for the segments by adjusting GAAP net income (loss) for certain investment-related
activities and credit guarantee-related activities. Segment Earnings includes certain reclassifications among income and
expense categories that have no impact on net income (loss) but provide us with a meaningful metric to assess the
performance of each segment and our company as a whole. We continue to assess the methodologies used for segment
reporting and refinements may be made in future periods. See “NOTE 16: SEGMENT REPORTING” to our consolidated
financial statements for further information regarding our segments and the adjustments and reclassifications used to
calculate Segment Earnings, as well as the management reporting and allocation process used to generate our segment
results.
Segment Earnings — Results
Investments
Our Investments business is responsible for investment activity in mortgages and mortgage-related securities, other
investments, debt financing, and managing our interest rate risk, liquidity and capital positions. We invest principally in
mortgage-related securities and single-family mortgages through our mortgage-related investments portfolio.
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