Freddie Mac 2012 Annual Report Download - page 60

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.
Our ability to recruit and retain executives and other employees with the necessary skills to conduct our business has
been, and may continue to be, adversely affected by 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, the uncertainty regarding the duration of the
conservatorship, 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.
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 target
compensation paid to our executive officers, which for 2012 performance was below the 25th percentile of the competitive
market. 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. Our senior executives are
prohibited by law from receiving bonuses during any period of conservatorship.
Voluntary turnover moderated in 2012 compared to 2011. However, we may find it difficult to retain critical employees
and attract people with the skills and experience we need for the reasons discussed above. In addition, the level of scrutiny
from FHFA and its Office of Inspector General and other regulators has contributed to stress levels throughout the
organization and placed additional burdens on staff. For more information about risks related to employee retention, see
“MD&A — RISK MANAGEMENT — Operational Risks.”
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. 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 noted that “[s]hould the risks I fear materialize, FHFA might well be forced to limit
[Freddie Mac and Fannie Mae’s] business activities. Some of the business [Freddie Mac and Fannie Mae] would be unable to
undertake might simply not occur, with potential disruption in housing markets and the economy.”
The conservatorship and investment by Treasury has had, and will continue to have, a material adverse effect on our
common and preferred stockholders.
Prior to our entry into conservatorship, the market price for our common stock declined substantially. After our entry
into conservatorship, the market price of our common stock continued to decline, and has been $1 or less per share since June
2010. As a result, the investments of our common and preferred stockholders lost substantial value, which they may never
recover. There is significant uncertainty as to what changes may occur to our business structure during or following our
conservatorship, including whether we will continue to exist. Therefore, it is likely that our shares could further diminish in
value, and they are not likely to have any value in the longer-term. The Acting Director of FHFA has stated that “[Freddie
Mac and Fannie Mae’s] equity holders retain an economic claim on the companies but that claim is subordinate to taxpayer
claims. As a practical matter, taxpayers are not likely to be repaid in full, so [Freddie Mac and Fannie Mae] stock lower in
priority is not likely to have any value.”
The conservatorship and investment by Treasury has had, and will continue to have, other material adverse effects on
our common and preferred stockholders, including the following:
•No voting rights during conservatorship. The rights and powers of our stockholders are suspended during the
conservatorship and our common stockholders do not have the ability to elect directors or to vote on other matters.
•Our future profits will effectively be distributed to Treasury. Under the Purchase Agreement, we are required to pay
dividends to the extent that our Net Worth Amount exceeds a permitted capital reserve amount. The amount of this
reserve decreases over time. Accordingly, over the long-term, we will not be able to build or retain any net worth
surplus, and our future profits will effectively be distributed to Treasury. Therefore, the holders of our common stock
and non-senior preferred stock will not receive benefits that would otherwise flow from any such future profits.
55 Freddie Mac