Freddie Mac 2012 Annual Report Download - page 182

In order to manage the risk of inaccurate or unreliable valuations of our financial instruments, we engage in an ongoing
internal review of our valuations. We perform analysis of valuations on a monthly basis to confirm the reasonableness of the
valuations. For more information on the controls in our valuation process, see “FAIR VALUE MEASUREMENTS AND
ANALYSIS — Fair Value Measurements — Valuation Processes and Controls over Fair Value Measurement.”
In the first half of 2012, we introduced a new compensation program for employees to help mitigate the uncertainty
surrounding compensation. Under the program, the majority of employees have a more predictable income, as the program
either reduces or eliminates the amount of compensation that is subject to variability. In the last three quarters of 2012,
employee turnover was lower than in the corresponding quarters of 2011. While employee turnover moderated in 2012
compared to 2011, we are exploring options to enter into various strategic arrangements with outside firms to provide
operational capability and staffing for key functions, if needed. Should we experience significant turnover in key areas, we
may need to exercise strategic arrangements and significantly increase the number of outside firms and consultants used in
our business operations, limit certain business activities, and/or increase our operational costs. The use of outside firms and
consultants could increase our operational risk in the near term until they become accustomed to our business systems and
practices and their new roles and responsibilities.
We have, at times, found it challenging to fill executive positions given the restrictions around compensation. We
operate in an environment in which many of our business decisions are closely scrutinized and subject to public criticism and
review by various government authorities. Some executives are unwilling to work in such an environment for potentially
significantly less than what they could earn elsewhere. 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.
Disruptive levels of turnover at both the executive and employee levels could lead to breakdowns in many of our
operations that impact our ability to: (a) serve our mission and meet our objectives; (b) manage credit and other risks related
to our mortgage portfolio; (c) reduce the need to draw funds from Treasury; and (d) issue timely financial statements. Our
ability to attract and retain executives and other employees is also adversely affected by the ongoing debate in Congress
regarding our: (a) current primary business objectives and whether we should be doing more to help distressed homeowners;
and (b) future business structure following conservatorship, including whether we will continue to exist. Moreover, the
Administration has called for a “wind down” of the GSEs, an ongoing development our employees follow closely.
A recovering economy may put additional pressures on turnover in 2013, as other attractive opportunities could become
available to people who we want to retain. For more information on these matters, including the potential impacts of the risks
related to employee retention, see “RISK FACTORS — Conservatorship and Related Matters — The conservatorship,
uncertainty concerning our future, and restrictions on our ability to compensate employees have had, and may continue to
have, an adverse effect on the retention and recruitment of executives and other employees, which could have a material
adverse effect on our ability to operate our business,” “— Operational Risks — Weaknesses in internal control over
financial reporting and in disclosure controls could result in errors and inadequate disclosures, affect operating results, and
cause investors to lose confidence in our reported results” and “— Management changes and turnover of key staff could
increase our operational and control risks and have a material adverse effect on our ability to do business and our results of
operations.”
Freddie Mac management has determined that current business recovery capabilities may not be effective in the event of
a catastrophic regional business event (e.g., a disaster that affects our Northern Virginia facilities) and could result in a
significant business disruption and inability to process transactions through normal business processes. While management
has developed a remediation plan to address the current capability gaps, any measures we take to mitigate this risk may not
be sufficient to respond to the full range of catastrophic events that may occur. The remediation plan is designed to improve
Freddie Mac’s ability to recover an acceptable level of critical business functionality within predetermined time frames to
address regional business disruptions, such as a terrorist event, natural disaster, loss of infrastructure services, denial of
access, and/or a pandemic. For more information, see “RISK FACTORS — Operational Risks — A failure in our
operational systems or infrastructure, or those of third parties, could impair our liquidity, disrupt our business, damage our
reputation, and cause losses.”
Management, including the company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the effectiveness of our internal control over financial reporting and our disclosure controls and procedures as of
December 31, 2012. As of December 31, 2012, we had one material weakness, related to conservatorship, which remained
unremediated, causing us to conclude that our internal control over financial reporting and our disclosure controls and
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