Freddie Mac 2011 Annual Report Download - page 271

Hedge Designation of Derivatives
At December 31, 2011 and 2010, we did not have any derivatives in hedge accounting relationships; however, there
are deferred net losses recorded in AOCI related to closed cash flow hedges. As shown in “Table 11.3 — AOCI Related to
Cash Flow Hedge Relationships”, the total AOCI related to derivatives designated as cash flow hedges was a loss of
$1.7 billion and $2.2 billion at December 31, 2011 and 2010, respectively, composed of deferred net losses on closed cash
flow hedges. Closed cash flow hedges involve derivatives that have been terminated or are no longer designated as cash
flow hedges. Fluctuations in prevailing market interest rates have no impact on the deferred portion of AOCI relating to
losses on closed cash flow hedges.
The previous deferred amount related to closed cash flow hedges remains in our AOCI balance and will be
recognized into earnings over the expected time period for which the forecasted transactions impact earnings. Over the
next 12 months, we estimate that approximately $415 million, net of taxes, of the $1.7 billion of cash flow hedge losses
in AOCI at December 31, 2011 will be reclassified into earnings. The maximum remaining length of time over which we
have hedged the exposure related to the variability in future cash flows on forecasted transactions, primarily forecasted
debt issuances, is 22 years. However, over 70% and 90% of AOCI relating to closed cash flow hedges at December 31,
2011 will be reclassified to earnings over the next five and ten years, respectively.
The table below presents the changes in AOCI related to derivatives designated as cash flow hedges. Net
reclassifications of losses to earnings represents the AOCI amount that was recognized in earnings as the originally
hedged forecasted transactions affected earnings, unless it was deemed probable that the forecasted transaction would not
occur. If it is probable that the forecasted transaction will not occur, then the deferred gain or loss associated with the
hedge related to the forecasted transaction would be reclassified into earnings immediately.
Table 11.3 — AOCI Related to Cash Flow Hedge Relationships
2011 2010 2009
Year Ended December 31,
(in millions)
Beginning balance
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,239) $(2,905) $(3,678)
Cumulative effect of change in accounting principle
(2)
...................................... — (7) —
Net reclassifications of losses to earnings
(3)
............................................. 509 673 773
Ending balance
(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,730) $(2,239) $(2,905)
(1) Represents net deferred gains and losses on closed (i.e., terminated or redesignated) cash flow hedges.
(2) Represents adjustment to initially apply the accounting guidance for accounting for transfers of financial assets and consolidation of VIEs, as well as
a change in the amortization method for certain related deferred items. Net of tax benefit of $4 million for the year ended December 31, 2010.
(3) Net of tax benefit of $249 million, $337 million, and $392 million for the years ended December 31, 2011, 2010, and 2009, respectively.
NOTE 12: FREDDIE MAC STOCKHOLDERS’ EQUITY (DEFICIT)
Issuance of Senior Preferred Stock
Pursuant to the Purchase Agreement described in “NOTE 2: CONSERVATORSHIP AND RELATED MATTERS,” we
issued one million shares of senior preferred stock to Treasury on September 8, 2008. The senior preferred stock was
issued to Treasury in partial consideration of Treasury’s commitment to provide funds to us under the Purchase
Agreement.
Shares of the senior preferred stock have a par value of $1, and have a stated value and initial liquidation preference
equal to $1,000 per share. The liquidation preference of the senior preferred stock is subject to adjustment. Dividends that
are not paid in cash for any dividend period will accrue and be added to the liquidation preference of the senior preferred
stock. In addition, any amounts Treasury pays to us pursuant to its funding commitment under the Purchase Agreement
and any quarterly commitment fees that are not paid in cash to Treasury nor waived by Treasury will be added to the
liquidation preference of the senior preferred stock. As described below, we may make payments to reduce the liquidation
preference of the senior preferred stock in limited circumstances.
Treasury, as the holder of the senior preferred stock, is entitled to receive, when, as and if declared by our Board of
Directors, cumulative quarterly cash dividends at the annual rate of 10% per year on the then-current liquidation
preference of the senior preferred stock. Total dividends paid in cash during 2011, 2010, and 2009 at the direction of the
Conservator were $6.5 billion, $5.7 billion, and $4.1 billion, respectively. If at any time we fail to pay cash dividends in a
timely manner, then immediately following such failure and for all dividend periods thereafter until the dividend period
following the date on which we have paid in cash full cumulative dividends (including any unpaid dividends added to the
liquidation preference), the dividend rate will be 12% per year.
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