Freddie Mac 2012 Annual Report Download - page 273

Hedge Designation of Derivatives
At December 31, 2012 and 2011, 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 10.3 — AOCI Related to Cash
Flow Hedge Relationships,” the total AOCI related to derivatives designated as cash flow hedges was a loss of $1.3 billion
and $1.7 billion at December 31, 2012 and 2011, 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 effect 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 affect earnings. Over the next 12 months,
we estimate that approximately $316 million, net of taxes, of the $1.3 billion of cash flow hedge losses in AOCI at
December 31, 2012 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
21 years. However, over 70% and 90% of AOCI relating to closed cash flow hedges at December 31, 2012 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 10.3 — AOCI Related to Cash Flow Hedge Relationships
Year Ended December 31,
2012 2011 2010
(in millions)
Beginning balance(1) ..................................................................... $(1,730) $(2,239) $(2,905)
Cumulative effect of change in accounting principle(2) ........................................... — — (7)
Net reclassifications of losses to earnings(3) ................................................... 414 509 673
Ending balance(1) ........................................................................ $(1,316) $(1,730) $(2,239)
(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 $198 million, $249 million, and $337 million for the years ended December 31, 2012, 2011, and 2010, respectively.
NOTE 11: 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. As discussed in “NOTE 2: CONSERVATORSHIP AND RELATED
MATTERS — Purchase Agreement,” the quarterly commitment fee has been suspended.
Treasury, as the holder of the senior preferred stock, is entitled to receive quarterly cash dividends, when, as and if
declared by our Board of Directors. Through December 31, 2012, the senior preferred stock accrued quarterly cumulative
dividends at a rate of 10% per year. However, under the August 2012 amendment to the Purchase Agreement, the fixed
dividend rate was replaced with a net worth sweep dividend beginning in the first quarter of 2013. Total dividends paid in
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