Freddie Mac 2011 Annual Report Download - page 56

If Treasury is unable to provide us with funding requested under the Purchase Agreement to address a deficit in our
net worth, FHFA could be required to place us into receivership.
Under the Purchase Agreement, Treasury made a commitment to provide funding, under certain conditions, to
eliminate deficits in our net worth. Under the GSE Act, FHFA must place us into receivership if FHFA determines in
writing that our assets are less than our obligations for a period of 60 calendar days. FHFA has notified us that the
measurement period for any mandatory receivership determination with respect to our assets and obligations would
commence no earlier than the SEC public filing deadline for our quarterly or annual financial statements and would
continue for 60 calendar days after that date. FHFA has also advised us that, if, during that 60-day period, we receive
funds from Treasury in an amount at least equal to the deficiency amount under the Purchase Agreement, the Director of
FHFA will not make a mandatory receivership determination. If funding has been requested under the Purchase Agreement
to address a deficit in our net worth, and Treasury is unable to provide us with such funding within the 60-day period
specified by FHFA, FHFA would be required to place us into receivership if our assets remain less than our obligations
during that 60-day period.
The conservatorship and uncertainty concerning our future has had, and will likely continue to have, an adverse effect
on the retention, recruitment, and engagement of management and other employees, which could have a material
adverse effect on our ability to operate our business.
Our ability to recruit, retain, and engage management and other employees with the necessary skills to conduct our
business has been, and will likely continue to be, adversely affected by the conservatorship, the uncertainty regarding its
duration, the potential for future legislative or regulatory actions that could significantly affect our existence and our role
in the secondary mortgage market, and the negative publicity concerning the GSEs. Accordingly, we may not be able to
retain or replace executives or other employees with the requisite institutional knowledge and the technical, operational,
risk management, and other key skills needed to conduct our business effectively. We may also face increased operational
risk if key employees leave the company.
The actions taken by Congress, Treasury, and the Conservator to date, or that may be taken by them or other
government agencies in the future, may have an adverse effect on the retention and recruitment of senior executives,
management, and other valuable employees. For example, we are subject to restrictions on the amount and type of
compensation we may pay our executives under conservatorship. Also contributing to our concerns regarding executive
retention risk is the aggregate level of compensation paid to our Section 16 executive officers, which for 2011
performance was significantly below the 25th percentile of market-based compensation. See “EXECUTIVE
COMPENSATION” for more information. We cannot offer equity-based compensation, which is both common in our
industry and provides a key incentive for employees to stay with the company. The Conservator directed us to maintain
individual salaries and wage rates for all employees at 2010 levels for 2011 and 2012 (except in the case of promotions or
significant changes in responsibilities). Given our current status, we cannot offer the prospects of even medium-term
employment, much less long-term. Continued public condemnation of the company and its employees creates yet another
obstacle to hiring and retaining the talent we need.
We are finding it difficult to retain and engage critical employees and attract people with the skills and experience
we need. Voluntary attrition rates for high performing employees, those with specialized skill sets, and those responsible
for controls over financial reporting have risen markedly since we were placed into conservatorship. This has led to
concerns about staffing inadequacies, management depth, and employee engagement. Attracting qualified senior
executives is particularly difficult. We operate in an environment in which virtually every business decision is closely
scrutinized and subject to public criticism and review by various government authorities. Many executives are unwilling to
work in such an environment for potentially significantly less than what they could earn elsewhere. A recovering economy
is likely to put additional pressures on turnover in 2012, as other attractive opportunities may become available to people
who we want to retain. The high and increasing level of scrutiny from FHFA and its Office of Inspector General and other
regulators has also heightened stress levels throughout the organization and placed additional burdens on staff.
In 2011, the Financial Services Committee of the House of Representatives approved a bill that would generally put
our employees on the federal government’s pay scale, and in 2012 the House and Senate each approved legislation
containing a provision that would prohibit senior executives from receiving bonuses during conservatorship. If this or
similar legislation were to become law, many of our employees would experience a sudden and sharp decrease in
compensation. The Acting Director of FHFA stated on November 15, 2011 that this “would certainly risk a substantial
exodus of talent, the best leaving first in many instances. [Freddie Mac and Fannie Mae] likely would suffer a rapidly
growing vacancy list and replacements with lesser skills and no experience in their specific jobs. A significant increase in
safety and soundness risks and in costly operational failures would, in my opinion, be highly likely.” The Acting Director
51 Freddie Mac