Freddie Mac 2012 Annual Report Download - page 96

Non-Interest Income (Loss)
Gains (Losses) on Extinguishment of Debt Securities of Consolidated Trusts
When we purchase PCs that have been issued by consolidated PC trusts, we extinguish a pro rata portion of the
outstanding debt securities of the related consolidated trusts. We recognize a gain (loss) on extinguishment of the debt
securities to the extent the amount paid to extinguish the debt security differs from its carrying value. For the years ended
December 31, 2012 and 2011, we extinguished debt securities of consolidated trusts with a UPB of $13.5 billion and $75.4
billion, respectively (representing our purchase of single-family PCs with a corresponding UPB amount). The decrease in
purchases of single-family PCs in 2012 was due to a decrease in the volume of dollar roll transactions to support the market
and pricing of our single-family PCs. Losses on extinguishment of these debt securities of consolidated trusts were $58
million and $219 million for the years ended December 31, 2012 and 2011, respectively. The losses during 2012 and 2011
were primarily due to the repurchase of our debt securities of consolidated trusts at higher net purchase premiums driven by a
decline in interest rates during the periods. See “Table 25 — Mortgage-Related Securities Purchase Activity” for additional
information regarding purchases of mortgage-related securities, including those issued by consolidated PC trusts.
Gains (Losses) on Retirement of Other Debt
We repurchase or call our outstanding other debt securities from time to time when we believe it is economically
beneficial and to manage the mix of liabilities funding our assets. When we repurchase or call outstanding debt securities, or
holders put outstanding debt securities to us, we recognize a gain or loss to the extent the amount paid to redeem the debt
security differs from its carrying value. See “NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for
more information regarding our accounting policies related to debt retirements.
Gains (losses) on retirement of other debt were $(77) million, $44 million, and $(219) million during the years ended
December 31, 2012, 2011, and 2010, respectively. We recognized losses on the retirement of other debt during 2012
primarily due to write-offs of unamortized deferred issuance costs related to calls of other debt securities. We recognized
gains on the retirement of other debt during 2011 primarily due to the repurchase of other debt securities at less than par. We
recognized losses on the retirement of other debt during 2010 primarily due to write-offs of unamortized deferred issuance
costs related to calls of other debt securities. For more information, see “LIQUIDITY AND CAPITAL RESOURCES —
Liquidity — Other Debt Securities —Other Debt Retirement Activities.”
Gains (Losses) on Debt Recorded at Fair Value
Gains (losses) on debt recorded at fair value primarily relate to changes in the fair value of our foreign-currency
denominated debt. During 2012, 2011, and 2010, we recognized gains on debt recorded at fair value of $16 million, $91
million, and $580 million, respectively, primarily due to a combination of the U.S. dollar strengthening relative to the Euro
and changes in interest rates. We mitigate changes in the fair value of our foreign-currency denominated debt by using
foreign currency swaps and foreign-currency denominated interest-rate swaps.
Derivative Gains (Losses)
The table below presents derivative gains (losses) reported in our consolidated statements of comprehensive income.
See “NOTE 10: DERIVATIVES — Table 10.2 — Gains and Losses on Derivatives” for information about gains and losses
related to specific categories of derivatives. Changes in fair value and interest accruals on derivatives not in hedge accounting
relationships are recorded as derivative gains (losses) in our consolidated statements of comprehensive income. At
December 31, 2012, 2011, and 2010, we did not have any derivatives in hedge accounting relationships; however, there are
amounts recorded in AOCI related to discontinued cash flow hedges. Amounts recorded in AOCI associated with these
closed cash flow hedges are reclassified to earnings when the forecasted transactions affect earnings. If it is probable that the
forecasted transaction will not occur, then the deferred gain or loss associated with the forecasted transaction is reclassified
into earnings immediately.
While derivatives are an important aspect of our strategy to manage interest-rate risk, they generally increase the
volatility of reported net income because, while fair value changes in derivatives affect net income, fair value changes in
several of the types of assets and liabilities being hedged do not affect net income. Beginning in the fourth quarter of 2011,
we began to increase the portion of our debt issued with longer-term maturities. This allows us to take advantage of attractive
long-term rates while decreasing our reliance on interest-rate swaps.
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