Freddie Mac 2011 Annual Report Download - page 182

While we believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to
maintain our access to the debt markets and to have adequate liquidity to conduct our normal business activities, the costs
of our debt funding could vary due to the uncertainty about the future of the GSEs and potential investor concerns about
the adequacy of funding available to us under the Purchase Agreement after 2012. The costs of our debt funding could
also increase due to the downgrades discussed above or in the event of any future downgrades in our credit ratings or the
credit ratings of the U.S. government. Upon funding of the draw request that FHFA will submit to eliminate our net worth
deficit at December 31, 2011, our aggregate funding received from Treasury under the Purchase Agreement will increase
to $71.3 billion. This aggregate funding amount does not include the initial $1.0 billion liquidation preference of senior
preferred stock that we issued to Treasury in September 2008 as an initial commitment fee and for which no cash was
received. Our draw request represents our net worth deficit at quarter-end rounded up to the nearest $1 million.
We are required to pay a quarterly commitment fee to Treasury under the Purchase Agreement, as discussed below in
“Dividend Obligation on the Senior Preferred Stock.”
The GSE Act requires us to set aside or allocate monies each year to certain funds managed by HUD and Treasury.
However, FHFA has suspended this requirement. For more information, see “BUSINESS — Regulation and
Supervision — Federal Housing Finance Agency — Affordable Housing Allocations.”
For more information on these matters, see “BUSINESS — Conservatorship and Related Matters” and “— Regulation
and Supervision.”
Dividend Obligation on the Senior Preferred Stock
Following funding of the draw request related to our net worth deficit at December 31, 2011, our annual cash
dividend obligation to Treasury on the senior preferred stock will increase from $7.22 billion to $7.23 billion, which
exceeds our annual historical earnings in all but one period. 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 dividends of $6.5 billion in cash on the senior preferred stock during
2011 at the direction of our Conservator. Through December 31, 2011, we paid aggregate cash dividends to Treasury of
$16.5 billion, an amount equal to 23% of our aggregate draws received under the Purchase Agreement. Continued cash
payment of senior preferred dividends will have an adverse impact on our future financial condition and net worth and
will increasingly drive future draws. In addition, we are required under the Purchase Agreement to pay a quarterly
commitment fee to Treasury, which could contribute to future draws if the fee is not waived. Treasury waived the fee for
all quarters of 2011 and the first quarter of 2012, but it has indicated that it remains committed to protecting taxpayers
and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment. The amount
of the fee has not yet been established and could be substantial.
The payment of dividends on our senior preferred stock in cash reduces our net worth. For periods in which our
earnings and other changes in equity do not result in positive net worth, draws under the Purchase Agreement effectively
fund the cash payment of senior preferred dividends to Treasury. Under the Purchase Agreement, our ability to repay the
liquidation preference of the senior preferred stock is limited and we will not be able to do so for the foreseeable future,
if at all.
As discussed in “Capital Resources,” we expect to make additional draws under the Purchase Agreement in future
periods. Further draws will increase the liquidation preference of and the dividends we owe on the senior preferred stock.
Other Debt Securities
We fund our business activities primarily through the issuance of short- and long-term debt. The investor base for our
debt is predominantly institutional. Competition for funding can vary with economic, financial market, and regulatory
environments. Historically, we have mainly competed for funds in the debt issuance markets with Fannie Mae and the
FHLBs. 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 our mix of liabilities funding our assets.
To fund our business activities, we depend on the continuing willingness of investors to purchase our debt securities.
We expect that, over time, the reduction in our mortgage-related investments portfolio will reduce our funding needs.
Changes or perceived changes in the government’s support of us could have a severe negative effect on our access to the
debt markets and on our debt funding costs. In addition, any change in applicable legislative or regulatory exemptions,
including those described in “BUSINESS — Regulation and Supervision,” could adversely affect our access to some debt
investors, thereby potentially increasing our debt funding costs.
177 Freddie Mac