Freddie Mac 2010 Annual Report Download - page 78

instrument of comparable maturity. Similarly, the combination of non-callable debt and a call swaption with the same
maturity as the noncallable debt is the substantive economic equivalent of callable debt. Due to limits on our ability to issue
long-term and callable debt in the second half of 2008 and the first few months of 2009, we pursued these strategies to an
increased extent during those periods. However, the use of these derivatives may expose us to additional counterparty credit
risk. For a discussion regarding our ability to issue debt, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity —
Other Debt Securities.”
During 2010, declining longer-term swap interest rates resulted in a loss on derivatives of $8.1 billion. Specifically, the
decrease in longer-term swap interest rates resulted in fair value losses on our pay-fixed swaps of $17.5 billion, partially
offset by fair value gains on our receive-fixed swaps of $9.7 billion. We recognized fair value gains of $4.8 billion on our
option-based derivatives, resulting from gains on our purchased call swaptions primarily due to the declines in forward
interest rates during 2010.
During 2009, the mix and volume of our derivative portfolio were impacted by fluctuations in swap interest rates,
resulting in a loss on derivatives of $1.9 billion. Longer-term swap interest rates and implied volatility both increased during
2009. As a result of these factors, we recorded gains on our pay-fixed swap positions, partially offset by losses on our
receive-fixed swaps, resulting in a $13.6 billion net gain. We also recorded losses of $10.7 billion on option-based
derivatives, primarily on our purchased call swaptions, as the impact of the increasing forward swap interest rates more than
offset the impact of higher implied volatility.
During 2008, we recognized a net derivative loss of $15.0 billion primarily because swap interest rates declined
significantly in 2008. We had a loss of $28.0 billion for interest-rate swaps that was partially offset by the gain of
$17.1 billion related to our option-based derivatives as a result of a decrease in forward swap interest rates combined with an
increase in implied volatility during 2008.
Investment Securities-Related Activities
Since January 1, 2010, as a result of our adoption of amendments to the accounting standards for transfers of financial
assets and consolidation of VIEs, we no longer account for the single-family PCs and certain Other Guarantee Transactions
we hold as investments in securities. Instead, we now recognize the underlying mortgage loans on our consolidated balance
sheets through consolidation of the related trusts. Our adoption of these amendments resulted in a decrease in our
investments in securities of $286.5 billion on January 1, 2010. See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES”
for additional information.
Impairments of Available-For-Sale Securities
We recorded net impairments of available-for-sale securities recognized in earnings of $4.3 billion, $11.2 billion, and
$17.7 billion during 2010, 2009, and 2008, respectively. See “CONSOLIDATED BALANCE SHEETS ANALYSIS —
Investments in Securities — Mortgage-Related Securities — Other-Than-Temporary Impairments on Available-For-Sale
Mortgage-Related Securities” and “NOTE 8: INVESTMENTS IN SECURITIES” for information regarding the accounting
principles for investments in debt and equity securities and the other-than-temporary impairments recorded during 2010,
2009, and 2008. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for information on how other-
than-temporary impairments are recorded on our financial statements commencing in the second quarter of 2009.
Other Gains (Losses) on Investment Securities Recognized in Earnings
Other gains (losses) on investment securities recognized in earnings primarily consists of gains (losses) on trading
securities. We recognized $(1.3) billion, $4.9 billion and $955 million related to gains (losses) on trading securities during
2010, 2009, and 2008, respectively.
The fair value of our securities classified as trading was approximately $60.3 billion at December 31, 2010 compared to
approximately $222.3 billion at December 31, 2009. The decline in fair value was primarily due to our adoption of
amendments to the accounting standards for transfers of financial assets and consolidation of VIEs on January 1, 2010,
pursuant to which we no longer account for the single-family PCs and certain Other Guarantee Transactions that we hold as
investment securities as stated above.
During 2010, the losses on trading securities was primarily due to the movement of securities with unrealized gains
towards maturity, particularly interest-only securities, partially offset by fair value gains on our non-interest-only securities
classified as trading primarily due to decreased interest rates.
During 2009, we recognized net gains on trading securities of $4.9 billion, compared to net gains of $955 million in
2008. The fair value of our securities classified as trading increased to $222.3 billion at December 31, 2009 compared to
$190.4 billion at December 31, 2008, primarily due to the increased balance of agency securities. The increased balance in
our investments in trading securities, combined with a steepening yield curve and tightening OAS levels, contributed
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