Freddie Mac 2011 Annual Report Download - page 68

mortgage-related securities have significantly declined. This changing composition presents heightened liquidity risk,
which influences management’s decisions regarding funding and hedging.
Government Support
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 our debt funding costs. Under the Purchase Agreement, the $200 billion cap on Treasury’s funding
commitment will increase as necessary to accommodate any cumulative reduction in our net worth during 2010, 2011, and
2012. 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 cost of our debt funding could
increase if debt investors believe that the risk that we could be placed into receivership is increasing. In addition, under
the Purchase Agreement, without the prior consent of Treasury, we may not increase our total indebtedness above a
specified limit or become liable for any subordinated indebtedness. For more information, see “MD&A — LIQUIDITY
AND CAPITAL RESOURCES — Liquidity — Actions of Treasury and FHFA.”
We do not currently have a liquidity backstop available to us (other than draws from Treasury under the Purchase
Agreement and Treasury’s ability to purchase up to $2.25 billion of our obligations under its permanent statutory
authority) if we are unable to obtain funding from issuances of debt or other conventional sources. At present, we are not
able to predict the likelihood that a liquidity backstop will be needed, or to identify the alternative sources of liquidity
that might be available to us if needed, other than from Treasury as referenced above.
Demand for Debt Funding
The willingness of domestic and foreign investors to purchase and hold our debt securities can be influenced by
many factors, including changes in the world economy, changes in foreign-currency exchange rates, regulatory and
political factors, as well as the availability of and preferences for other investments. If investors were to divest their
holdings or reduce their purchases of our debt securities, our funding costs could increase and our business activities
could be curtailed. The willingness of investors to purchase or hold our debt securities, and any changes to such
willingness, may materially affect our liquidity, business and results of operations.
Competition for Debt Funding
We compete for low-cost debt funding with Fannie Mae, the FHLBs, and other institutions. Competition for debt
funding from these entities can vary with changes in economic, financial market, and regulatory environments. Increased
competition for low-cost debt funding may result in a higher cost to finance our business, which could negatively affect
our financial results. An inability to issue debt securities at attractive rates in amounts sufficient to fund our business
activities and meet our obligations could have an adverse effect on our business, liquidity, financial condition, and results
of operations. See “MD&A — LIQUIDITY AND CAPITAL RESOURCES — Liquidity — Other Debt Securities” for a
description of our debt issuance programs.
Our funding costs may also be affected by changes in the amount of, and demand for, debt issued by Treasury.
Line of Credit
We maintain a secured intraday line of credit to provide additional intraday liquidity to fund our activities through
the Fedwire system. This line of credit requires us to post collateral to a third party. In certain circumstances, this secured
counterparty may be able to repledge the collateral underlying our financing without our consent. In addition, because the
secured intraday line of credit is uncommitted, we may not be able to continue to draw on it if and when needed.
Any downgrade in the credit ratings of the U.S. government would likely be followed by a downgrade in our credit
ratings. A downgrade in the credit ratings of our debt could adversely affect our liquidity and other aspects of our
business.
Nationally recognized statistical rating organizations play an important role in determining, by means of the ratings
they assign to issuers and their debt, the availability and cost of funding. Our credit ratings are important to our liquidity.
We currently receive ratings from three nationally recognized statistical rating organizations (S&P, Moody’s, and Fitch)
for our unsecured borrowings. These ratings are primarily based on the support we receive from Treasury, and therefore
are affected by changes in the credit ratings of the U.S. government.
63 Freddie Mac