FREDDIE MAC (FHLMC) 10-K 2009
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission File Number: 000-53330
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer o Non-accelerated filer (Do not check if a smaller reporting company) x Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the common stock held by non-affiliates computed by reference to the price at which the common equity was last sold on June 30, 2008 (the last business day of the registrants most recently completed second fiscal quarter) was $10.6 billion.
As of February 25, 2009, there were 647,364,714 shares of the registrants common stock outstanding.
TABLE OF CONTENTS
The Federal Home Loan Mortgage Corporation (Freddie Mac or the company) is filing this Amendment No. 1 on Form 10-K/A to its Annual Report on Form 10-K for the fiscal year ended December 31, 2008, or the Form 10-K, to provide the additional information required by Part III of Form 10-K. This Amendment No. 1 on Form 10-K/A does not change the previously reported financial statements or any of the other disclosures contained in Part I or Part II of the Form 10-K, which was filed on March 11, 2009. Part IV is being amended solely to add as exhibits certain new certifications in accordance with Rule 13a-14(a) promulgated by the Securities and Exchange Commission, or the SEC, under the Securities Exchange Act of 1934, or the Exchange Act, and certain agreements relating to the compensation of our named executive officers.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
On September 6, 2008, the Director of the Federal Housing Finance Agency, or FHFA, appointed FHFA as the Conservator of Freddie Mac. Upon its appointment as Conservator, FHFA immediately succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director of Freddie Mac with respect to Freddie Mac and its assets, including, without limitation, the right of holders of Freddie Mac common stock to vote with respect to the election of directors and any other matter for which stockholder approval is required or deemed advisable. In view of the Conservators succession to all of the voting power of Freddie Macs stockholders, Freddie Mac will not solicit proxies, distribute a proxy statement to stockholders, or hold an annual meeting of stockholders in 2009. Instead, the Conservator has elected directors through a written consent in lieu of an annual meeting.
On November 24, 2008, the Conservator reconstituted the Board of Directors, or the Board, of Freddie Mac and delegated certain powers to the Board while reserving certain powers of approval to itself. On December 18, 2008, that delegation of authority became effective when FHFA appointed members to the Board. FHFA, as Conservator of Freddie Mac, has determined that the Board will have a non-executive Chairman, and will consist of a minimum of nine and not more than 13 directors, with the Chief Executive Officer being the only corporate officer serving as a member of the Board. Before Freddie Mac entered conservatorship, nominees for election to its Board of Directors were recommended by the former Governance, Nominating and Risk Oversight Committee, or the GNROC, of the Board and nominated by the Board. The selection and appointment of directors by FHFA constitutes a material change in the procedures by which stockholders recommend nominees. Because FHFA holds all of the voting power of the stockholders during the period of conservatorship, Freddie Macs stockholders no longer have the ability to recommend director nominees or vote for the election of the directors of Freddie Mac.
On December 18, 2008, FHFA appointed the following directors to Freddie Macs Board of Directors: Barbara T. Alexander; Linda B. Bammann; Carolyn H. Byrd; Robert R. Glauber; Laurence E. Hirsch; Christopher S. Lynch; David M. Moffett; Nicolas P. Retsinas; Eugene B. Shanks, Jr.; and Anthony A. Williams. Mr. Moffett was Freddie Macs Chief Executive Officer at the time. As a result of these appointments, the companys Board consisted of 11 members: Non-Executive Chairman John A. Koskinen (appointed by the Conservator on September 16, 2008); three directors who were on the Board prior to FHFAs appointment as Conservator on September 6, 2008 (Barbara T. Alexander, Robert R. Glauber and Nicolas P. Retsinas); and seven directors new to the Board. Mr. Moffett resigned from his position as Chief Executive Officer and as a member of the Board effective March 13, 2009. This and other vacancies may be filled by the Board, subject to approval by the Conservator. The Board named Mr. Koskinen as the companys Interim Chief Executive Officer and Mr. Glauber as its Interim Non-Executive Chairman effective upon Mr. Moffetts resignation. In addition, on April 22, 2009, David Kellermann, our Acting Chief Financial Officer, died. Mr. Koskinen will perform the function of principal financial officer on an interim basis. Pending the appointment of a principal financial officer, Mr. Moffett has agreed to return to the company temporarily as a consultant to Mr. Koskinen to provide advice and assistance in connection with Mr. Koskinens functioning as principal financial officer. In addition, the Board is working to appoint a permanent Chief Executive Officer and a permanent Chief Financial Officer. Following the appointment of a Chief Executive Officer, the Board expects that Mr. Koskinen will return to the position of Non-Executive Chairman. On March 25, 2009, the Conservator executed a written consent re-electing each of the directors listed below to serve as directors of Freddie Mac. These directors were re-elected for a term that will end (i) on the date of the next annual meeting of stockholders of Freddie Mac, or (ii) on the date the Conservator next executes a written consent for the purpose of electing directors, whichever occurs first.
In connection with its appointment of new directors, FHFA, as Conservator, has delegated certain roles and responsibilities to the reconstituted Board, as discussed below. As amended by the Federal Housing Finance Regulatory Reform Act of 2008, or the Reform Act, our charter provides that our Board must at all times have at least one person from the homebuilding, mortgage lending and real estate industries, and at least one person from an organization representing community or consumer interests or one person who has demonstrated a career commitment to the provision of housing for low-income households.
The following is a brief biographical description of each of the directors as of April 1, 2009:
Authority of the Board and New Board Committees
The directors serve on behalf of, and exercise authority as directed by, the Conservator. The Conservator has instructed the Board that it should consult with and obtain the approval of the Conservator before taking action in the following areas:
The Board has four standing committees: Audit; Business and Risk; Compensation; and Nominating and Governance. The membership of current Board members on each committee is shown in the table below.
The duties of the five standing Board committees in existence on September 6, 2008 have been merged into one of these four committees, and charters reflecting the duties of the committees have been adopted by the Board and approved by the Conservator. All the charters of the standing committees are available on our website at www.freddiemac.com/governance/bd_committees.html. Printed copies are also available to any stockholder upon request to the Corporate Secretary at the address specified below under Communications with Directors.
Freddie Macs Board has an independent Non-Executive Chairman, whose responsibilities include presiding over meetings of the Board of Directors, regularly scheduled executive sessions of the non-management directors and, at least once annually, executive sessions including only the independent directors. Mr. Koskinen was appointed to the position of Non-Executive Chairman by the Conservator in September 2008, and he served in that position until he assumed the position of Interim Chief Executive Officer, effective March 13, 2009. Mr. Glauber assumed the position of Interim Non-Executive Chairman effective March 13, 2009.
Communications with Directors
Interested parties wishing to communicate any concerns or questions about Freddie Mac to the Interim Non-Executive Chairman of the Board or to our non-management directors as a group may do so by U.S. mail, addressed to the Corporate Secretary, Freddie Mac, Mail Stop 200, 8200 Jones Branch Drive, McLean, VA 22102-3110. Communications may be addressed to a specific director or directors, including Mr. Glauber, the Interim Non-Executive Chairman of the Board, or to groups of directors, such as the independent or non-management directors.
As of April 23, 2009, our executive officers are as follows:
The following is a brief biographical description of each executive officer who is not also a member of the Board of Directors.
Robert E. Bostrom was appointed Executive Vice President General Counsel & Corporate Secretary in February 2006. Prior to joining us, Mr. Bostrom was the managing partner of the New York office of Winston & Strawn LLP, a member of that firms executive committee and head of its financial institutions practice. Mr. Bostrom originally joined Winston & Strawn in 1990. From 1992 until 1996, Mr. Bostrom served as Executive Vice President of Legal, Regulatory and Compliance and General Counsel of National Westminster Bancorp.
Paul G. George was appointed Executive Vice President Human Resources & Corporate Services in December 2006. He joined us in August 2005 as Executive Vice President, Human Resources. Prior to joining us, Mr. George was Senior Executive Vice President of Human Resources at Wachovia Corp. from July 1999 through December 2004. Prior to that, he was a member of Waste Management Inc.s interim management team from 1998 to 1999. He also served for approximately nine years as Senior Vice President of Human Resources at United Airlines. Between 1985 and 1988 he was Vice President of Human Resources at Pacific Southwest Airlines. Prior to that, he was a partner at the law firm Meserve, Mumper & Hughes.
Michael Perlman was appointed Executive Vice President Operations & Technology in August 2007. Prior to joining us, Mr. Perlman was a managing director at Morgan Stanley until July 2007, where he developed operations and technology infrastructure to support their Fixed Income and Global Operations Divisions. Mr. Perlman also played significant roles in building Morgan Stanleys institutional processing systems. Before joining Morgan Stanley in September 1997, Mr. Perlman was a founding partner at AT&T Solutions Financial Services Group and a partner in the Washington, DC and New York offices of Deloitte & Touche, where he specialized in large-scale business and technology renovation.
Raymond G. Romano was appointed Executive Vice President & Chief Credit Officer in April 2009. Prior to this appointment, he served as our Senior Vice President Chief Credit Officer from December 2008 until March 2009 and as acting Chief Credit Officer from September 2008 until December 2008. Before being appointed Chief Credit Officer, Mr. Romano served as the Senior Vice President Credit Risk Oversight at Freddie Mac, a position he held since March 2004. Prior to that, Mr. Romano served as Senior Vice President and Chief Credit Risk Officer and other executive positions at different major financial institutions including North American Mortgage Company in Tampa, Dime Savings Bank of NY, and with Citicorps Investment Bank.
Donald J. Bisenius was appointed Senior Vice President Single Family Credit Guarantee in May 2008. Prior to holding his current position, he served as the Senior Vice President Credit Policy and Portfolio Management from
November 2003 until April 2008. From August 1998 until October 2003 he was the Senior Vice President of various groups, including Credit Risk Management and Risk Assessment and Model Development. Prior to that, he served as Vice President Mortgage Credit Policy from May 1997 until July 1998. He joined us in January 1992 as the Director of Portfolio Quality in the Mortgage Credit Policy Department. Prior to joining Freddie Mac, Mr. Bisenius served in a variety of positions with the Federal Housing Finance Board and the Federal Home Loan Bank Board in Washington, DC.
Timothy F. Kenny was appointed Senior Vice President General Auditor in July 2008. Prior to this appointment, Mr. Kenny served as Vice President and Interim General Auditor starting in May 2008. Before that, he served as our Vice President, Assistant General Auditor from September 2007 to May 2008. From 2001 to 2007, Mr. Kenny was a Managing Director with BearingPoint, Inc. (formerly KPMG Consulting, Inc.) where he directed a large team of financial professionals on a variety of financial risk management consulting projects with Ginnie Mae, the Federal Housing Administration, private sector mortgage bankers and other federal credit agencies. He was appointed a member of the BearingPoint, Inc. 401(k) Plan Committee in 2004 and served as a member until his resignation in 2007. He joined KPMG LLP, the predecessor organization to KPMG Consulting, in 1986, was promoted to a KPMG Audit Partner in 1997, and served in that position until the separation of KPMG Consulting from KPMG LLP in February 2001.
Michael C. May was appointed Senior Vice President Multifamily in August 2005. Prior to this appointment, Mr. May served as our Senior Vice President, Operations starting in February 2005. He also served as Senior Vice President, Mortgage Sourcing, Operations & Funding from October 2003 to February 2005. Prior to that, Mr. May held the positions of Senior Vice President, Single Family Operations from July 2002 to October 2003 and Senior Vice President, Project Enterprise from January 2001 to July 2002. Mr. May also held various positions at our company since joining us in 1983, including Senior Vice President, Customer Services and Control, Vice President of Loan Prospector and Vice President of Structured Finance.
Hollis S. McLoughlin was appointed Senior Vice President External Relations in September 2008. Prior to that he served as Senior Vice President External Relations and Chief of Staff from June 2007 until September 2008. Prior to this appointment, Mr. McLoughlin served as our Senior Vice President, External Relations starting in January 2006. He also served as Senior Vice President and Chief of Staff from April 2004 to January 2006. From 1998, Mr. McLoughlin was Chief Operating Officer of two private equity-backed operating companies. Before that, he was one of the founding partners of Darby Overseas, a private equity partnership based in Washington, D.C. He also has been a senior executive at Purolator Courier, an overnight delivery company, and a privately held transportation company. From 1989 through 1992, Mr. McLoughlin served as Assistant Secretary of the Treasury under former President George H. W. Bush. He served as Chief of Staff to Sen. Nicholas Brady, R-N.J., in 1982 and to Rep. Millicent Fenwick, R-N.J., from 1975 to 1979.
Paul E. Mullings was appointed Senior Vice President Single Family Sourcing in July 2005. Before joining us, Mr. Mullings was Senior Vice President of JPMorgan Chase and Mortgage Finance and Fair Lending Executive at Chase Home Finance. Prior to joining Chase Home Finance in 1997, Mr. Mullings was President and Chief Executive Officer of Mortgage Electronic Registration Systems, Inc. Mr. Mullings was also President and Chief Executive Officer of the residential mortgage division of First Interstate Bank, Los Angeles. Prior to First Interstate, he held a series of increasingly responsible senior management positions at Glendale Federal Bank, Glendale, California.
Anurag Saksena was appointed Senior Vice President Chief Enterprise Risk Officer in August 2005. Prior to joining us, Mr. Saksena led Enterprise Risk Management at General Motors Acceptance Corporation from July 1999 to December 2004. In addition, Mr. Saksena founded Enterprise Risk Advisors, LLC. He has also held risk and portfolio management positions of increasing responsibility at Société Générale in New York, Royal Bank Financial Group in Toronto and Great-West Life Assurance Company in Winnipeg.
Jerry Weiss was appointed Senior Vice President Compliance, Regulatory Affairs and Mission, and Chief Compliance Officer in April 2009. More recently, he has also become responsible for overseeing both the companys affordable housing mission and activities related to the Presidents Homeowners Affordability and Stability Plan. Prior to this appointment, Mr. Weiss served as our Senior Vice President and Chief Compliance Officer starting in October 2003. Prior to joining us, Mr. Weiss worked from 1990 at Merrill Lynch Investment Managers, most recently as First Vice President and Global Head of Compliance. From 1982 to 1990, Mr. Weiss was with a national law practice in Washington, D.C., where he specialized in securities regulation and corporate finance matters.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires directors and certain officers of reporting companies, and persons who own more than 10% of a registered class of such companys equity securities, to file reports of ownership and changes in ownership with the SEC and the exchange on which such companys securities trade, and to furnish the company with copies of the reports. Since we completed our registration with the SEC on July 18, 2008, our directors and executive officers have filed such reports with the SEC. From January 1, 2008 until July 17, 2008, our directors and executive officers provided the equivalent of Section 16(a) reports to us, and we made them available on our website at www.freddiemac.com within the time frames required for Section 16(a) reports. Based solely on a review of such reports, we believe that during 2008 our directors and executive officers complied with such reporting obligations.
Codes of Conduct
We have separate codes of conduct applicable to employees and to Board members that outline the principles, policies and laws governing their activities. The employee and Board codes were revised effective February 25, 2008. Additional revisions reflecting policy updates and technical amendments were made to the Board code, effective November 20, 2008. Additional changes were also made to the employee code, effective December 19, 2008, reflecting certain technical, administrative or other non-substantive amendments. Upon joining Freddie Mac or its Board, all employees and directors, respectively, are required to sign acknowledgements that they have read the applicable code and agree to abide by it. In addition, all employees and directors must respond to an annual questionnaire concerning code compliance. The employee code also serves as the code of ethics for senior executives and financial officers required by the Sarbanes-Oxley Act and SEC regulations. Copies of our employee and director codes of conduct are available, and any amendments or waivers that would be required to be disclosed are posted, on our website at www.freddiemac.com. Printed copies of the codes of conduct also are available to any stockholder upon request to the Corporate Secretary, at the address specified above under Communications with Directors.
Freddie Mac has entered into an indemnification agreement with each of the current directors and Mr. Moffett (each, an indemnitee). The indemnification agreements were effective as of the date of the respective directors appointment to the Board, except that the indemnification agreements with Ms. Alexander and Messrs. Glauber, Moffett and Retsinas were effective as of September 6, 2008. Freddie Mac has also entered into an indemnification agreement, effective September 6, 2008, with each of our executive officers and Mr. Kellermann (each also an indemnitee). A copy of the form of indemnification agreement is attached as Exhibit 10.2 to our Form 8-K filed on December 23, 2008 and is incorporated herein by reference.
The indemnification agreements provide that Freddie Mac will indemnify the indemnitee to the fullest extent permitted by Freddie Macs Bylaws and Virginia law. This obligation includes, subject to certain terms and conditions, indemnification against all liabilities and expenses (including attorneys fees) actually and reasonably incurred by the indemnitee in connection with any threatened or pending action, suit or proceeding, except such liabilities and expenses as are incurred because of the indemnitees willful misconduct or knowing violation of criminal law. The indemnification agreements provide that if requested by the indemnitee, Freddie Mac will advance expenses, subject to repayment by the indemnitee of any funds advanced if it is ultimately determined that the indemnitee is not entitled to indemnification. The rights to indemnification under the indemnification agreements are not exclusive of any other right the indemnitee may have under any statute, agreement or otherwise. Freddie Macs obligations under the indemnification agreements will continue after the indemnitee is no longer a director or officer of the company with respect to any possible claims based on the fact that the indemnitee was a director or officer, and the indemnification agreements will remain in effect in the event the conservatorship is terminated. The indemnification agreements also provide that indemnification for actions instituted by FHFA will be governed by the standards set forth in FHFAs Notice of Proposed Rulemaking published in the Federal Register on November 14, 2008, proposing an amendment to FHFAs interim final Golden Parachute Payments regulation to address prohibited and permissible indemnification payments.
Audit Committee Financial Expert
We have a standing Audit Committee that satisfies the audit committee definition under Section 3(a)(58)(A) of the Exchange Act, the requirements of Rule 10A-3 under the Exchange Act and Sections 303A.06 and 303A.07 of the NYSE Listed Company Manual. The current members of the Audit Committee are Linda B. Bammann, Carolyn H. Byrd, Robert R. Glauber and Christopher S. Lynch.
Mr. Lynch has been a member of the Audit Committee since December 18, 2008 and currently is its chairman. FHFA and the Board have determined that Mr. Lynch is independent within the meaning of Rule 10A-3 under the Exchange Act and Section 303A.02 of the NYSE Listed Company Manual and that he meets the definition of an audit committee financial expert under SEC regulations.
NYSE Governance Standards
The NYSE listing standards require each listed companys chief executive officer to certify annually that he or she is not aware of any violation by the company of the NYSEs corporate governance listing standards, qualifying the certification to the extent necessary. In July 2008, we submitted to the NYSE our Chief Executive Officers certificate without qualification, and we have submitted interim written affirmations pertaining to various governance matters since then. We have been in discussions with the staff of the NYSE regarding the effect of the conservatorship on our ongoing compliance with the rules of the NYSE and the continued listing of our stock on the NYSE in light of the unique circumstances of the conservatorship. As of the date of this report, we believe we are in compliance with the NYSEs corporate governance listing standards and we have not been informed by the NYSE of any related non-compliance. For more information on NYSE matters relating to the company, including information relating to the notice from the NYSE regarding compliance with the standards for continued listing resulting from the price of our common stock being less than $1.00 per share, see our Form 10-K, Item 1 Business Conservatorship and Related Developments New York Stock Exchange Matters.
The certifications required under the Sarbanes-Oxley Act have been filed as exhibits to our Form 10-K and to this amendment on Form 10-K/A.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Our Compensation Discussion and Analysis addresses the following items:
Our company strives to provide liquidity, affordability and stability to the U.S. housing market. To achieve these objectives, we must hire, retain and motivate executives to effectively implement our business strategies and respond to changing market conditions. 2008 was an exceptionally difficult year as the housing sector suffered the most severe downturn in at least the past 70 years, which significantly affected our financial performance for the year and led to our conservatorship. This formed the basis for the manner in which FHFA and our compensation committee ultimately decided to compensate our executive officers for 2008.
What is the Statutory and Regulatory Framework for Oversight of Our Compensation Programs?
Federal statutes have provided for regulatory oversight of our executive compensation for many years. Regulatory authorities with respect to compensation were expanded in July 2008 with the enactment of the Reform Act and further expanded when we entered conservatorship in September 2008. As a result, FHFA reviewed, designed or approved important parts of our executive compensation for 2008. This compensation included primarily base salary and retention awards, but not performance bonuses or long-term incentive awards.
Set forth below is a summary of the sources of FHFAs authority with respect to our compensation programs:
FHFA has stated that Fannie Mae and Freddie Mac were placed into conservatorship to ensure they could fulfill their extremely important mission of providing liquidity, stability and affordability to the very troubled mortgage market. More recently, Fannie Mae and Freddie Mac have become, according to FHFA, central players in the Presidents Making Home Affordable plan. Given the current predominant role [they] play in the nations mortgage market, it is imperative that FHFA ensure their continued functioning and safe and sound operations.
Shortly after Freddie Mac was placed into conservatorship, the employment with the company of our former Chief Executive Officer, former Chief Financial Officer and former Chief Business Officer was terminated. More recently, a second Chief Executive Officer and our Senior Vice President Investments & Capital Markets, who had overall responsibility for managing our mortgage investments portfolio, also have left the company. None of these individuals received any termination benefits. In addition, on April 22, 2009, David Kellermann, our Acting Chief Financial
Officer, died. His death will result in the payment of certain benefits as described below. We are currently operating with an Interim Chief Executive Officer who is also performing the function of principal financial officer on an interim basis. FHFA has stated that [a]s the previous senior management teams left, it would have been catastrophic to lose the next layers down and other highly experienced employees.
Under conservatorship, the incentives available for our remaining executive officers have been significantly limited, as their previously awarded equity compensation has lost almost all of its value, and they have received no cash bonuses or performance-based equity awards for 2008. FHFA has indicated that, under these circumstances, a retention program to encourage the remaining executive officers and other key employees to stay with the company is critical to a successful conservatorship. Such a program is particularly important given the uncertainties regarding the companys future status to which the conservatorship and related developments have given rise. Maintaining stable operations and preserving the companys assets in the face of these uncertainties will require continuity of executive management and staff. As FHFA has stated, [t]he success of the Administrations recently announced Making Home Affordable program, aimed at preventing foreclosures and stabilizing housing markets, depends on the continued efforts of.... both executives and staff.... [T]he loss of key personnel would be devastating to the companies and to the governments efforts to stabilize the housing system.
The broad terms of Freddie Macs retention program were developed by FHFA, in consultation with management, FHFAs outside compensation consultant and Treasury. These terms were described in our Current Reports on Form 8-K filed on September 23 and 30, 2008, and are discussed below under What Was the Impact of Conservatorship on Executive Compensation? 2008 Executive Compensation Decisions Made or Approved by the Conservator. The retention award payments to executive officers in December 2008 were made pursuant to this FHFA-developed retention program.
Effective December 18, 2008, FHFA reconstituted Freddie Macs Board of Directors, including a new Compensation Committee. Since then, the Compensation Committee has been working closely with management and FHFA to develop compensation programs for 2009 that will continue to provide appropriate incentives for executive officers and other employees to achieve the critical objectives that have been established for the company in promoting the national goal of stabilizing the housing markets. These compensation programs, and the related performance objectives and funding levels, are approved by the Compensation Committee. Under the delegation of authority issued by FHFA when it reconstituted the Board, FHFA will approve the compensation payable to executive officers under these programs.
Who Were Our Named Executive Officers for 2008?
The following nine individuals were determined to be the named executive officers of Freddie Mac for the year ended December 31, 2008:
David M. Moffett, former Chief Executive Officer
Richard F. Syron, former Chairman of the Board and Chief Executive Officer
David B. Kellermann, former Acting Chief Financial Officer
Anthony S. Piszel, former Executive Vice President and Chief Financial Officer
Patricia L. Cook, former Executive Vice President Chief Business Officer
Kirk S. Die, former Senior Vice President General Auditor
Gary D. Kain, former Senior Vice President Investments & Capital Markets
Robert E. Bostrom, Executive Vice President General Counsel & Corporate Secretary
Paul G. George, Executive Vice President Human Resources & Corporate Services
Information about the types and amounts of compensation paid to these individuals during 2008 is set forth below under Compensation Tables.
What Were Our 2008 Pre-Conservatorship Compensation Objectives and Processes?
Before conservatorship, the principal objectives of our compensation program for named executive officers were to (i) attract and retain high caliber executives, (ii) motivate them to achieve annual and long-term corporate and individual objectives that were aligned with the interests of our stockholders, assist Freddie Mac in fulfilling its
statutory mission to provide liquidity, stability and affordability to the U.S. housing market and promote housing for low- and moderate-income families and those living in underserved areas and (iii) reward the executives when those objectives were met or exceeded.
In addition to individual performance and a review of compensation against the market, in determining named executive officer compensation, the pre-conservatorship Compensation and Human Resources Committee, or the CHRC, considered the following:
Achieving our compensation objectives required the CHRC and management to exercise significant judgment. As a starting point for this exercise of judgment, we generally established a target total direct compensation opportunity for each named executive officer. For these purposes, total direct compensation consisted of base salary, target cash bonus opportunity and target long-term incentive opportunity. The cash bonus opportunity could vary significantly from year to year based on an assessment of corporate, divisional and individual performance. The long-term incentive opportunity was a stock-based award granted on an annual basis which could vary significantly from year to year based on an assessment of corporate, divisional and individual performance.
What Was the Pre-Conservatorship Process Used to Determine 2008 Compensation?
Step 1: We Determined Our Comparator Group. To evaluate each named executive officers then-current compensation compared to the competitive market, we reviewed the compensation of executives in comparable positions at companies that are either in a similar line of business or are otherwise comparable for purposes of recruiting and retaining individuals with the requisite skills and capabilities. We refer to this group of companies as the Comparator Group. In 2007, we reviewed and discussed the composition of the Comparator Group with the CHRC and Hewitt, a global human resources consulting firm, and determined that the following companies should be included for 2008:
In certain circumstances, we used alternative survey sources to assess competitive market compensation levels. For more information, see When Do We Use Alternative Survey Sources? below.
Step 2: We Established Target Compensation. In setting target total direct compensation levels for our named executive officers, we used as a guideline the market median, or 50th percentile, of the total direct compensation, consisting of base salary, annual bonus and annual long-term equity awards, paid to comparable positions at Comparator Group companies. While the market median was used as the guideline for total direct compensation, the pre-conservatorship CHRC had the authority to establish target total direct compensation which was higher or lower, as it deemed appropriate for each named executive officer. An additional factor considered by the CHRC was that the total direct compensation of our named executive officers must be consistent with our charter, which requires that compensation of our executives be reasonable and comparable with the compensation of executives performing similar duties in similar businesses.
In March 2008, the CHRC applied the compensation criteria described above to set 2008 target total direct compensation for the named executive officers. The CHRC also set target bonus funding levels for the 2008
performance year, including bonus targets applicable to the named executive officers. In establishing 2008 compensation targets, the CHRC considered a variety of factors, including an assessment of the executive officers 2007 performance; criticality of role and level of proficiency for that year; a comparison of the executives 2007 target compensation to the competitive market data; the executives compensation for prior years; the projected value of the executives unvested equity; and, where applicable, the executives employment agreement.
Additionally, the CHRC was provided with a tally sheet for each of the executive officers, which disclosed, among other items, total compensation and benefits paid to, or accrued for, each executive officer; the estimated year-over-year actuarial increase in qualified and non-qualified pension benefits; the value of all outstanding equity awards; the estimated value and summary of various perquisites received; and the estimated potential value of compensation due if an executive officer were terminated by Freddie Mac for reasons other than for cause. The tally sheet enabled the CHRC to assess the reasonableness of the total value of compensation and benefits provided. However, the level of an executive officers post-termination benefits and other benefits historically did not affect the CHRCs determination of any individual named executive officers target or actual base salary, annual bonus or annual long-term incentive award. Additionally, the CHRC did not seek to maintain any fixed relationship between the various elements of compensation, or to standardize the mix of compensation for named executive officers, but rather based the target amount of compensation for each named executive officer primarily on market data for each position.
Historically, our compensation included restricted stock units, or RSUs. An RSU represents a conditional contractual right to receive one share of our common stock at a specified future date subject to certain restrictions (i.e., the vesting period, and, in certain cases, performance-based conditions or criteria). The underlying stock is not issued until the restrictions lapse, at which time the RSU is settled or, if previously elected by the grantee for grants made prior to 2008, deferred. RSUs do not have voting rights because they are not considered legally issued or outstanding shares. RSUs that were part of regular long-term equity awards generally vest in four installments at the rate of 25% on each anniversary of the grant date.
What Are the Other Elements of Compensation for Our Named Executives?
We provide the following other elements of compensation for our named executive officers:
Executive Deferred Compensation. Executive officers are permitted to defer receipt of up to 80% of their base salary and 100% of their cash bonus compensation. This feature permits executives to postpone recognition of income for tax purposes to future years when their incomes and effective tax rates may be lower.
Employee Benefits. Our employee benefits have been a fundamental part of our compensation program and an important tool in recruiting and retaining executives.
Perquisites. In 2008, we provided our named executives limited perquisites not available to our general employee population, to the extent we believed they were appropriate for retaining and attracting named executives or based on the business needs of the named executives in the performance of their job responsibilities. These perquisites included relocation benefits (including moving, temporary living and home selling and buying assistance), financial planning services, annual physical examinations, and, for the Chief Executive Officer only, a home security system, personal travel on charter aircraft by the executive and accompanying immediate family members in connection with business travel and as permitted by company policy, and personal use of a car and driver for commuting in the Washington, D.C. area.
The company has suspended its charter flights policy pending further review by the Compensation Committee.
Post-Termination Compensation. Certain employment agreements and offer letters applicable to the named executive officers provide special termination benefits beyond our firm-wide severance plan. For more information, see Potential Payments Upon Termination or Change in Control and Employment and Separation Agreements.
What Was the Impact of Conservatorship on Executive Compensation?
The compensation philosophy, practices and arrangements historically followed by Freddie Mac to assess executive performance and set executive compensation have not been applied fully with respect to compensation decisions relating to services rendered by the executives in 2008 and may not apply to compensation decisions for services rendered by the executives in 2009. FHFA has determined that none of the named executive officers will receive an annual bonus or long-term incentive award for their performance in 2008. Accordingly, the performance of such executives against scorecards or other specific corporate performance measures did not determine their compensation with respect to 2008. In addition, most members of the pre-conservatorship Board resigned following conservatorship. FHFA reconstituted the Board of Freddie Mac, revised the Boards committee structure and assigned responsibility for executive compensation matters to the new Compensation Committee.
2008 Executive Compensation Decisions Made or Approved by Our Conservator
Upon its appointment as our Conservator in September 2008, FHFA succeeded to all rights, titles, powers and privileges of Freddie Mac, and of any stockholder, officer or director of Freddie Mac with respect to Freddie Mac and its assets. As a result, our then-existing Board of Directors no longer had the power or duty to manage, direct or oversee the business and affairs of Freddie Mac, and the then-existing Board and its committees, including the CHRC, ceased functioning from the date of conservatorship until late December 2008. Of the compensation determinations for 2008 discussed below, only the base salary levels for our executive officers who served prior to conservatorship, the payment of Mr. Syrons special extension bonus and the terms of Mr. Kains employment agreement were determined by the CHRC of the prior Board. The rest of the executive compensation decisions discussed below were determined by or approved by FHFA, in consultation with the Secretary of the Treasury. In particular, the determinations that incentive compensation, including performance-based RSUs, would not be paid for 2008 and decisions regarding the structure of the Retention Program (described below) were made by FHFA. The amount of the retention awards and Mr. Moffetts $900,000 annual salary were approved by FHFA. See Compensation Tables Grants of Plan-Based Awards 2008. The discussion below is based in part on information provided by FHFA regarding the factors it considered in reaching these executive compensation determinations.
Conservators Determination Relating to 2008 Annual Bonus and Long-Term Incentive Awards. On September 17, 2008, our Conservator determined that no executive officer would be entitled to receive a cash bonus for 2008. In addition, our Conservator determined that long-term incentive awards would not be made to any executive officer for 2008.
Conservators Establishment of the Retention Program. On September 17, 2008, our Conservator established an employee retention program, which we refer to as the Retention Program, under which some of our named executives received cash retention awards.
In establishing the Retention Program, which was implemented prior to Treasurys announcement of compensation restrictions at certain U.S. financial institutions and recent legislative proposals to impose new restrictions on executive compensation or increase federal taxes on bonus compensation paid by certain financial institutions, our Conservator sought to provide meaningful financial incentives for employees to remain at Freddie Mac. Retaining critical employees is essential to ensure our viability while Congress, the Administration and other parties determine what the form and function of the company will be in future years.
When it established the Retention Program, FHFA directed that the pool from which retention awards could be paid to our executive officers would be funded at an amount no greater than 75% of the aggregate annualized 2008 bonus target amounts that previously had been established for executive officers by the CHRC. FHFA established this amount based on advice from its compensation consultant, HayGroup, regarding the appropriate structure and size of a retention program, based on HayGroups experience and familiarity with programs at other firms in related circumstances. In reaching this amount, FHFA sought to balance the goal of retaining critical executives with the need to limit compensation to an appropriate level given our current circumstances.
Individual awards for named executives under the Retention Program ranged from 0% to 150% of the target bonus established under our former cash bonus program for the executives position, unless otherwise approved by FHFA. The retention awards for Messrs. Kellermann and George exceeded 150% of their respective annualized target bonuses, and were approved by FHFA. See Direct Compensation Paid or Granted to Current Named Executives in 2008 below.
The size of the retention awards was based on the criticality to the company of the position that each executive holds, the expertise of the individual and the individuals future potential. The overall pool for retention awards was smaller than the potential 2008 pool for awards under our previous annual cash bonus program; however, a specific individuals award could be significantly less or greater than the individuals target annual bonus. The awards were structured this way in recognition of Freddie Macs unsatisfactory performance in 2008, coupled with our urgent need to retain people occupying critical positions.
Individual retention awards were approved by FHFA in September 2008. In approving these awards, FHFA considered the recommendations of Mr. Moffett, who followed guidelines provided by FHFA regarding appropriate ranges for awards as a percentage of target bonuses under our former cash bonus program.
Sixty-five percent of each cash retention award is service-based, payable in three installments as follows: 20% was paid in December 2008, 20% will become payable in August 2009 and 25% will become payable in December 2009. The August 2009 and December 2009 payments will become payable only if the named executive remains employed by us. The remaining 35% of each of these awards is performance-based and may become payable in March 2010 if the named executive continues to be employed by us at that time. Eligibility for the payment will be based on the executive receiving a satisfactory performance rating and performance against the goals established for each executive receiving an award under the Retention Program. By structuring awards to provide for payments over an 18-month period, the Retention Program was designed to provide incentives for employees to remain at Freddie Mac. The amounts and payment schedule for these awards and the performance goals applicable to each of our current named executive officers receiving retention awards are set forth below under Direct Compensation Paid or Granted to Current Named Executives in 2008.
The Retention Program includes a provision that requires payment of award amounts to participating executives even if their employment at Freddie Mac ends due to death or disability, or is terminated by Freddie Mac (or by our Conservator) for any reason other than gross misconduct (i.e., terminated under circumstances that would call for the payment of severance under company policy). This feature of the Retention Program recognizes that during our conservatorship, when long-term business and career prospects are uncertain and the companys future structure, mission and critical executive skill sets have not yet been defined, a retention program is most likely to be effective if it reduces executive uncertainty by providing for payment upon separation in circumstances where the separation does not indicate gross misconduct on the part of the executive.
Direct Compensation Paid or Granted to Current Named Executives in 2008. The following table shows the direct compensation granted in 2008 to our currently employed named executive officers. Messrs. Bostrom and George are our only named executive officers currently employed by Freddie Mac. No amounts are shown in this table for stock awards because, unlike in previous years, the named executive officers received no stock-based awards for 2008 performance. This table includes only some of the components of 2008 compensation that are reported in the Summary Compensation Table required under applicable SEC rules, which is set forth below under Compensation Tables Summary Compensation Table. It is not intended to replace any portion of the Summary Compensation Table or its accompanying footnotes.
2009 Executive Compensation Decisions Made or Approved by the Compensation Committee and Our Conservator
In September 2008, our Conservator initially determined that our executive compensation for 2009 would consist of: (1) salary, (2) the opportunity to receive cash bonuses under the annual cash bonus program and (3) the opportunity to receive long-term incentive deferred cash awards. However, standards regarding executive compensation levels and components, particularly in the financial services industry, are changing significantly. For example, the American Recovery and Reinvestment Act of 2009, signed into law on February 17, 2009, provides limitations on executive compensation for entities receiving financial assistance under the Troubled Assets Relief Program, or TARP. We have not received assistance under TARP. Additionally, on February 4, 2009, Treasury announced new restrictions on executive compensation that will apply prospectively to certain financial institutions receiving government assistance. It is not yet clear whether these new standards, or other market developments, might affect our executive compensation program for 2009.
Compensation Paid or Granted Since Conservatorship
Salary Determinations. Mr. Moffett received an annual salary of $900,000 per year, prorated for the time he was employed by Freddie Mac.
No decisions have been made yet regarding 2009 salaries for our continuing named executives, and they are currently being paid at their 2008 salary levels. It is anticipated that determinations regarding salary, incentive awards and other forms of compensation for 2009, and the performance objectives to be used in making such determinations, will be made by the Compensation Committee, in consultation with FHFA, management and the compensation consultant firms engaged by FHFA and the Compensation Committee (currently HayGroup and Hewitt, respectively). It is not clear what portion (if any) of the companys previous process for setting compensation will be applied by FHFA.
Retention Award Determinations. The terms of the awards made to our named executive officers under the Retention Program are discussed under 2008 Executive Compensation Decisions Made or Approved by Our Conservator above.
Separation Benefit Determinations. The separation benefits that were paid to Mr. Die in connection with his departure from Freddie Mac are discussed under Employment and Separation Agreements below.
What Written Agreements Do We Have That Provide for Continued Employment of Our Named Executive Officers?
While most of our officers are not covered by employment agreements, some of the former named executive officers had employment agreements or offer letters that provide certain contractual protections, such as guaranteed base salary levels, guaranteed incentive payments in certain situations and/or special termination benefits in certain circumstances, including a change in control of Freddie Mac or termination of the executive, which are described in Potential Payments Upon Termination or Change in Control and Employment and Separation Agreements.
None of the offer letters to which any of our current named executive officers is a party includes any currently effective provision that calls for guaranteed amounts of base salary or incentive payments or special termination benefits.
The termination provisions contained in our former named executive officers agreements differ significantly among the named executive officers. These differences grew out of the different negotiations that occurred with respect to the employment of the former named executive officers. With the exception of Messrs. Kellermann and Kain, all of our named executive officers were hired since 2003, when we announced the need to restate our financial results for 2000 through 2002. As is typical in such periods of transition, uncertainties among executive officers about their tenure and long-term prospects are greater than they otherwise would be. We believe the contractual protections provided were necessary to recruit and retain these executives. During the negotiations with our former named executive officers, we relied on the advice of Hewitt and competitive market survey data in the financial services industry provided by Hewitt in structuring the post-employment compensation arrangements. Each arrangement was entered into following arms-length negotiations with the named executive officer. In addition, each post-employment compensation arrangement was submitted to OFHEO, the predecessor of FHFA, for its review and approval as required by law. We believe these provisions were instrumental in the decisions of these executives to join Freddie Mac.
Compensation arrangements for David M. Moffett, our former Chief Executive Officer, were determined by FHFA in its capacity as Conservator. Mr. Moffett resigned effective March 13, 2009.
In November 2005, Mr. Kain entered into an agreement with Freddie Mac setting the terms of his employment as Senior Vice President Mortgage Investment and Structuring (the position he held prior to being promoted to Senior Vice President Investments and Capital Markets) through December 31, 2008 and the compensation he was to be paid. A more detailed description of that agreement is provided below under Employment and Separation Agreements. Among other things, Mr. Kains employment agreement provided that in the event that Mr. Kain terminated his employment with Freddie Mac for any reason during 2009, Freddie Mac would be obligated to pay him for 2008 an amount which, when added to certain other amounts previously paid to him with respect to 2008, would bring the total compensation paid to him for 2008 to $3 million, which was the total amount of compensation we agreed to pay him for each of 2006, 2007 and 2008. Mr. Kain resigned his employment with Freddie Mac effective January 20, 2009. FHFA determined that Freddie Mac would not provide any termination benefits to Mr. Kain pursuant to the November 2005 employment agreement, including any payment of termination benefits. See Employment and Separation Agreements for additional information.
What Role Will Our Boards Compensation Committee Have in Setting Compensation in 2009?
As described above, FHFA has reconstituted our Board and appointed a Compensation Committee. Although the Compensation Committee will take the lead role in considering and recommending executive compensation, the following circumstances will affect the Compensation Committees exercise of its authority:
Other Executive Compensation Considerations
What Are Our Stock Ownership and Hedging Policies?
In November 2008, FHFA approved the suspension of our stock ownership guidelines because of the difficulty of meeting the requirements at current market prices and because we had ceased paying our executives stock-based compensation. Also, the Purchase Agreement prohibits us from issuing any shares of Freddie Mac equity securities. The suspension of stock ownership requirements is expected to continue through the conservatorship and until Freddie Mac resumes granting stock-based compensation.
All employees, including our named executives, are prohibited from purchasing and selling derivative securities related to our equity securities, including warrants, puts and calls, or from dealing in any derivative securities other than pursuant to our stock-based benefit plans.
What is the Role of Compensation Consultants?
The Compensation Committee has retained and is assisted by Hewitt in carrying out its responsibilities. Hewitts role is to assist the Compensation Committee (and previously, the CHRC) with oversight of compensation and benefits. In addition, on an ad-hoc basis, the Compensation Committee or the full Board may engage Hewitt for special projects. Hewitt also provided consulting services to the companys management during 2008 regarding various compensation and benefit matters. In its capacity as a consultant to management, Hewitt also helps management identify acceptable approaches to ensure that compensation continues to clearly link to short- and long-term performance.
The Compensation Committee engages Hewitt directly and requires management to disclose annually to the Compensation Committee the work performed by and the fees paid to Hewitt, including any work Hewitt performed for management. The Compensation Committee annually reviews and pre-approves any services that Hewitt will provide to management so that the Compensation Committee can determine that Hewitts acceptance of engagements and remuneration from management has not impaired the firms ability to provide independent advice regarding management compensation to the Compensation Committee. Fees for Hewitts consulting advice to the Compensation Committee, the CHRC and the GNROC for the year ended December 31, 2008 were approximately $216,000, including travel expenses for attendance at committee meetings. Fees for Hewitts services to management for the year ended December 31, 2008 were approximately $170,000, including travel expenses for attendance at meetings.
When Do We Use Alternative Survey Sources?
We have not always been able to use the Comparator Group to obtain competitive compensation information for all named executive officers, such as when comparable executive positions do not exist in the Comparator Group or when available data are incomplete. In those instances, we have used data from alternative widely used survey sources for financial services companies. In those cases in which the alternative survey sources do not identify executive positions comparable to our positions, we have set compensation targets based on our best estimate of the relative scope and responsibilities of the position as compared to the scope and responsibilities of comparable positions within Freddie Mac for which survey data exists.
For Ms. Cooks position, Executive Vice President Chief Business Officer and Mr. Kains position, Senior Vice President Investments & Capital Markets, a reasonable match and/or sufficient data were not available in the Comparator Group and a survey by McLagan, an Aon consulting company, was used. Overall, we believe the financial services companies that participated in the McLagan survey appropriately represent our relevant labor market, and that the McLagan survey is an appropriate source of compensation data for jobs that cannot be found in the Hewitt Comparator Group survey. To protect the confidentiality of the companies participating in the surveys used to set Ms. Cooks and Mr. Kains compensation, McLagan did not identify these companies.
Did Mr. Syron Receive Any Payment in Connection with His Special Performance Award?
In November 2007, the CHRC granted a special performance award to Mr. Syron consisting of a special, one-time cash award opportunity designed to provide additional incentive and recognition for the extension of his employment agreement and completion of key tasks beyond the performance measures established by the 2007 Bonus Funding Scorecard. The award was to cover the period from June 1, 2007 through September 30, 2009. The amount of the special performance award was to have ranged from $0 to $6 million, with no guarantee that any payment would be made.
In connection with the extension of his employment agreement, Mr. Syron was also to receive a special extension bonus of $3,500,000, payable in three installments. In July 2007 and July 2008, Mr. Syron received payments of $1,250,000 and $1,500,000, which were the first and second installment payments, respectively, of the special extension bonus. The third installment of $750,000 was cancelled upon the termination of Mr. Syrons employment.
On September 7, 2008, FHFA, acting as Conservator, replaced Mr. Syron as Chief Executive Officer. On November 7, 2008, Mr. Syron ceased to be an employee of Freddie Mac and left the company without receiving any further payment under any agreement or arrangement between Mr. Syron and Freddie Mac, including the special performance award and the special extension bonus. For more information on the special performance award and the special extension bonus, see our Form 10 filed with the SEC on July 18, 2008.
Is There Any Regulatory Oversight of Our Compensation Process for Named Executive Officers?
Until July 2008, OFHEO, as our safety and soundness regulator, had a defined role in overseeing the compensation of our named executive officers, as well as the compensation of certain other executive officers. We notified OFHEO of actions relating to the compensation of this group of executives. Under then-existing law, OFHEO was permitted to prohibit compensation to such executives that it determined to be unreasonable or not comparable to the pay earned by similar executives in similar businesses. In addition, OFHEO had to approve any termination benefits that we wished to provide to this group of executives.
As the successor to OFHEO, FHFAs powers with respect to executive compensation were substantially expanded by two events that occurred in 2008: (i) the enactment of the Reform Act, and (ii) our conservatorship. Among other things, the Reform Act authorizes FHFA to consider a broad range of factors (including possible wrongdoing by an executive) in deciding whether compensation is reasonable and comparable under the statutory standard; permits FHFA to withhold and escrow amounts of compensation while it reviews reasonableness and comparability; and allows FHFA to (a) reduce or set aside termination benefits, even if it had previously approved such benefits; (b) approve, disapprove or modify executive compensation in other respects, during the period of Treasurys temporary authority to purchase debt, preferred stock, and other securities issued by Freddie Mac; (c) prohibit golden parachute or indemnification payments; (d) take other actions regarding compensation if it finds that the compensation constitutes an unsafe or unsound practice; and (e) exercise other powers if it finds us to be significantly undercapitalized (including replacement of any of our directors and executive officers).
What is Our Compensation Recoupment Policy?
Our standard RSU and stock option award agreements provide that, in the event that the employee seeks or accepts employment with one of our competitors (as defined in the agreement), any unvested RSUs and any unexercised stock options would be immediately cancelled and forfeited and that the recipient would be required to repay all after-tax gains recognized upon the settlement of RSUs or exercise of our stock options under the award.
Section 304 of the Sarbanes-Oxley Act provides that if we are required to restate our financials due to material noncompliance with any financial reporting requirement under the securities laws as a result of misconduct, our Chief Executive Officer and our Chief Financial Officer must reimburse us for (1) any bonus or other incentive-based or equity-based compensation received during the 12 months following the first public issuance of the non-complying document, and (2) any profits realized from the sale of our securities during those 12 months.
How Do We Determine the Grant Date of Equity Awards?
As previously discussed, no equity grants were made for 2008 performance and no grants are contemplated for the foreseeable future. However, at times when equity grants are or have been made, Freddie Mac has had a policy for the dating of all equity grants. The effective date of grant was the date of the CHRC meeting at which an award was approved, unless there was material non-public information pending. If there was material non-public information pending, the effective date of grant would be deferred to the third business day following the public announcement of the material non-public information. The effective date of grant for sign-on awards was the next regularly scheduled meeting of the CHRC following the CHRCs approval and the individuals first date of employment. However, under the terms of the Purchase Agreement, Freddie Mac may not, without the prior consent of Treasury, issue capital stock of any kind, including equity grants.
Compensation Committee Interlocks and Insider Participation
None of the members of the Board of Directors who served on the Compensation Committee (or its predecessor, the CHRC) during fiscal year 2008 were officers or employees of Freddie Mac or had any relationship with Freddie Mac that would be required to be disclosed by Freddie Mac under Item 407(e)(4) of Regulation S-K.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such review and discussion, has recommended that the Compensation Discussion and Analysis be included in this amendment to our Annual Report on Form 10-K.
This report is respectfully submitted by the members of the Compensation Committee of the Board.
Eugene B. Shanks, Jr., Chairman
Barbara T. Alexander
Linda B. Bammann
Christopher S. Lynch
As noted above, the Compensation Committee was reconstituted as of December 18, 2008 when FHFA appointed new directors to the Board, and it held its first meeting on December 31, 2008.
The following tables set forth compensation information for all individuals who served as our Chief Executive Officer during 2008, all individuals who served as our Chief Financial Officer during 2008, our three other most highly compensated executive officers who were serving as executive officers as of December 31, 2008, and two executive officers who otherwise would have been listed in the table but had ceased to be executive officers before December 31, 2008.
Summary Compensation Table
The amounts shown in the Stock Awards and Option Awards columns of the Summary Compensation Table represent amounts recognized as equity awards expense for financial statement reporting purposes in accordance with SFAS No. 123(R), which are primarily based on the trading price of our common stock on the date of grant for RSUs and the fair value of options estimated using a Black-Scholes option pricing model. Accordingly, the values shown are significantly higher than the value ultimately realized on these awards by our named executive officers, especially for 2008. The following table provides a comparison of 2008 total compensation for all named executive officers as reported in the Summary Compensation Table, with a recalculated amount that reflects the value of RSUs that vested during 2008, based on the closing market price of our common stock on the vesting dates. The adjusted amounts presented in the second column below differ substantially from the total compensation amounts presented in the 2008 Summary Compensation Table required by the SEC and are not substitutes for those amounts.
The only difference between total compensation as reported in the 2008 Summary Compensation Table and the adjusted amount presented above is the treatment of stock and option awards. The amounts reported in the 2008 Summary Compensation Table represent the expense recognized for financial statement reporting purposes with respect to equity awards outstanding at any point in 2008 (including unvested awards granted in previous years). The stock and option award amounts included in the second column above reflect the value for RSUs that vested during 2008, based on the
closing price of our common stock on the vesting date. That price is multiplied by the number of RSUs that vested. No value is included for stock options, as no vested and exercisable options were exercised during 2008 by the named executive officers, nor is the exercise price of any such options less than the closing price of our common stock on December 31, 2008.
The amounts shown in 2008 for Messrs. George, Bostrom, Kellermann and Kain represent the first of four installment payments under the Retention Program established on September 17, 2008 following our entry into conservatorship. Like the first installment paid in 2008, the second and third installments payable during 2009 are service-based i.e., contingent only on the executives remaining employed by us on the date each payment is scheduled to be made. The aggregate amounts payable to the named executives currently employed by us if they remain so employed in 2009 are as follows: Mr. Bostrom $405,000; and Mr. George $585,000. The final performance-based phase of the retention award, which is payable in 2010 only upon attainment of certain performance objectives, is set forth below in the Grant of Plan-Based Awards table. For more information about the terms of the Retention Program and the amount of awards thereunder, see Compensation Discussion and Analysis What Was the Impact of Conservatorship on Executive Compensation? 2008 Executive Compensation Decisions Made or Approved by Our Conservator Direct Compensation Paid or Granted to Current Named Executives in 2008. Mr. Kellermann received the first of the service-based installments in 2008. Pursuant to the terms of the award agreement, the remaining payments of $680,000 became payable upon his death. Mr. Kain received only the first of the service-based installments. His eligibility for the second through fourth installments was forfeited upon his resignation in January 2009. The amount shown for Mr. Kain in 2008 also reflects $1,730 for an Inventor Recognition Award, which included a tax gross-up.
Mr. Syrons bonus in 2008 and 2007 includes the first two installment payments of a special extension bonus of $1,500,000 and $1,250,000, respectively, for his agreement to extend the terms of his employment agreement. Mr. Piszels bonus in 2006 includes a one-time cash sign-on bonus of $2,500,000.
Grants of RSUs include the right to receive dividend equivalents. Stock options granted prior to January 1, 2006 also include dividend equivalent rights on each share underlying the option equal to the dividend per share declared and paid on our outstanding common stock. As a result of an amendment made in response to Code Section 409A, dividend equivalents on stock options not vested as of December 31, 2004 are distributed as soon as practicable after dividends on our common stock have been declared and paid. Dividend equivalents on stock options vested as of December 31, 2004, are accrued and payable in cash upon exercise or expiration of the option.
Although dividends on common stock have been suspended during the conservatorship by order of the Conservator, payment of accrued dividend equivalents on stock options vested as of December 31, 2004 will occur as those options expire unexercised.
The value of dividend equivalents is recognized in the compensation expense of the stock option and RSU awards shown in the 2008 Summary Compensation Table. The table below shows the actual amount of cash dividend equivalents paid in the years shown to the named executive officers on their outstanding RSU awards and the portions of their outstanding stock option awards that were not vested and exercisable before January 1, 2005.
With the exception of Messrs. Kellermann, Kain and Syron, the values reported include amounts that the named executive officers are not currently entitled to receive because such amounts are not yet vested. The amounts reported do not include values associated with retiree medical benefits, which are generally available on the same terms to all employees.
The amounts reported for Messrs. Kellermann, Kain and George also include the above-market earnings on their accumulated balances in the Executive Deferred Compensation Plan as of December 31, 2008. The amounts of the above-market earnings for these individuals are as follows: Mr. Kellermann $3,632; Mr. Kain $55,051; and Mr. George $6,459. Deferrals under the Executive Deferred Compensation Plan are credited with interest compounded daily at the rate of 1% per annum in excess of the prime rate as reported by the Wall Street Journal on the
first business day of each calendar year during the deferral period. In 2008, interest was credited at a rate of 8.25% based on the prime rate on January 2, 2008 of 7.25% plus 1%. Nonqualified deferred compensation earnings included for Messrs. Kellermann, Kain and George consisted of the above-market portion of interest paid in 2008, which was 3.02%, equal to the 8.25% credited minus 120% of the applicable federal long-term rate, or 5.23%.
For additional information regarding the Thrift/401(k) SERP Benefit, see Non-qualified Deferred Compensation below. Amounts for the Thrift/401(k) Savings Plan Contributions and Thrift/401(k) SERP Accruals are presented without regard to vesting status.
FlexDollars are provided under our Flexible Benefits Plan and are generally available to all employees to offset costs related to medical coverage, dental coverage, vision coverage, group term life insurance, accidental death and personal loss insurance, and vacation purchase. FlexDollars can be used to offset the cost of other benefits and any unused FlexDollars are payable as taxable income.
We provided Mr. Syron life insurance policies totaling $10,000,000 to be paid in the event of his death and a disability policy due to be paid to Mr. Syron in the event of his disability. This commitment to Mr. Syron ended upon the termination of his employment with us. Amounts reported reflect premiums paid on these policies.
Perquisites include financial planning services, personal use of car and driver for commuting in the Washington, D.C. metro area (for Messrs. Moffett and Syron only), a home security system and personal air charter travel by the executive and accompanying family members in connection with business travel and as permitted by company policy (for Mr. Syron only), vacation in excess of that provided to other employees to accommodate travel plans that were in place at the time of hire (for Mr. Moffett only), relocation expenses and annual physical examinations. Perquisites are valued at their aggregate incremental cost to Freddie Mac. During the years reported, the aggregate value of perquisites furnished to all other named executive officers was less than $10,000. In accordance with SEC rules, amounts shown under All Other Compensation do not include perquisites or personal benefits for a named executive that, in the aggregate, amount to less than $10,000.
Grants of Plan-Based Awards 2008
The following table contains information concerning grants of plan-based awards to each of the named executive officers during 2008.
Mr. Kain received his initial service-based payment but forfeited all remaining payments under his award (including the $350,000 shown in this column) as a result of his voluntary termination of employment, effective January 20, 2009. Pursuant to the terms of his retention award, the amount reported in the Estimated Future Payments Under Non-Equity Incentive Plan Awards Target column for Mr. Kellermann became payable upon his death on April 22, 2009.
The RSUs and Performance RSUs granted to the named executive officers on March 7, 2008 vest at a rate of 25% on each anniversary of the grant date. The Supplemental RSUs granted to the named executive officers vest in three equal annual installments beginning on the first anniversary of the grant date.
The grant date fair value of RSU, Performance RSU and Supplemental RSU awards is calculated by multiplying the number of RSUs granted by the grant date fair value of our common stock. The grant date fair value of the RSU, Performance RSU and Supplemental RSU awards made in 2008 is based on the fair market value of our common stock on March 7, 2008, which was $19.65, except for Mr. Kellermanns Supplemental RSU award, which is based on the fair market value of our common stock on March 6, 2008, which was $20.14.
Outstanding Equity Awards at Fiscal Year-End 2008
The following table shows outstanding equity awards held by the named executive officers as of December 31, 2008.
Mr. Syrons option awards were unexercised stock options that, pursuant to his employment agreement, remain exercisable for three years following his November 2008 termination. Pursuant to his grant agreements, Mr. Kellermanns stock options vested upon his death on April 22, 2009 and remain exercisable for 36 months, unless they expire earlier pursuant to their terms. All of Mr. Kellermanns unvested RSUs vested upon his death and became nonforfeitable immediately. Ms. Cooks option awards were unexercised stock options that remained exercisable for 90 days following her November 2008 termination. As of the date of this filing, all of her stock options have expired.
For information on alternative settlement provisions of RSU and stock option grants in the event of certain terminations, see Potential Payments Upon Termination or Change in Control below.
Option Exercises and Stock Vested 2008
The following table sets forth information concerning value realized upon the vesting of RSUs during 2008 by each of the named executive officers. No named executive officer exercised options in 2008.
Pension Benefits 2008
The following table shows the actuarial present value of the accumulated retirement benefits payable under the Freddie Mac Employees Pension Plan, or Pension Plan, and the component of the Freddie Mac Supplemental Executive Retirement Plan that relates to the Pension Plan, or Pension SERP Benefit, for each of the named executive officers, computed as of December 31, 2008. A summary of the material terms of each plan follows the table, including information on early retirement.
The Pension Plan is a tax-qualified, defined benefit pension plan that we maintain, covering substantially all employees who have attained age 21 and completed one year of service with us. Pension Plan benefits are based on an employees years of service and compensation, up to limits imposed by law. Specifically, the normal retirement benefit under the Pension Plan for service after December 31, 1988 is a monthly payment commencing at age 65 calculated as follows:
For purposes of the Pension Plan, compensation includes the non-deferred base salary paid to each employee, as well as overtime pay, shift differentials, non-deferred bonuses paid under our corporate-wide annual bonus program or pursuant to a functional incentive plan (excluding the value of any stock options or cash equivalents), commissions, and amounts deferred under the Thrift/401(k) Savings Plan, the Flexible Benefits Plan and qualified transportation benefits under Code Section 132(f)(4). Compensation does not include supplemental compensation plans providing temporary pay, or any amounts paid after termination of employment.
Notwithstanding the lump sum nature of the disclosure in the table above, lump sum payments are not permitted under the Pension Plan if the present value of the accrued benefit would equal or exceed $25,000. The normal form of benefit under the Pension Plan is an annuity providing monthly payments for the life of the participant (and a survivor annuity for the participants spouse if applicable). Optional forms of benefit payment are available. A benefit with an actuarial present value equal to or less than $5,000 may only be paid as a lump sum.
Participants under the Pension Plan who terminate employment before age 55 with at least five years of service are considered terminated vested participants. Such participants may commence their benefit under the Pension Plan as early as age 55. The benefit is equal to the vested portion of the participants accrued benefit, reduced by 1/180th for each of the first 60 months, and by 1/360th for each of the next 60 months, by which the commencement of such benefits precedes age 65.
An early retirement benefit is available to a participant who terminates employment on or after age 55 with at least five years of service. This early retirement benefit is reduced by three percent (3%) for each year (prorated monthly for partial years) by which the commencement of such benefits precedes the earlier of (i) age 65 or (ii) such participants attainment of age 62 or later with at least 15 years of service. Death benefits are available provided participant completed at least five years of service prior to death.
Supplemental Executive Retirement Plan Pension SERP Benefit
The Pension SERP Benefit component of the SERP is designed to provide participants with the full amount of benefits to which they would have been entitled under the Pension Plan if that plan (1) was not subject to certain limits on compensation that can be taken into account under the Code and (2) did not exclude from compensation amounts deferred under our Executive Deferred Compensation Plan. For example, the Pension Plan is only permitted under the Code to consider the first $230,000 of an employees compensation during 2008 for the purpose of determining the participants compensation-based normal retirement benefit. We believe the Pension SERP Benefit is an appropriate benefit because offering such a benefit helps us remain competitive with companies in the Comparator Group.
The Pension SERP Benefit is calculated as the participants accrued annual benefit payable at age 65 (or current age, if greater) under the Pension Plan without application of the limits described in the preceding paragraph, less the participants actual accrued benefit under the Pension Plan. The Pension SERP Benefit is vested for each participant to the same extent that the participant is vested in the corresponding benefit under the Pension Plan.
To be eligible for the Pension SERP Benefit for any year, the named executive officer must be eligible to participate in the Pension Plan and eligible for matching contributions and basic contributions under the Thrift/401(k) Savings Plan for part of that year.
Pension SERP Benefits that vest on or after January 1, 2005 are generally distributed in a lump sum after separation from service and are payable 90 days after the end of the calendar year in which separation occurs. Subject to plan limitations and restrictions under Code Section 409A, employees may elect that this portion of the Pension SERP be paid upon separation in the form of a single life annuity at age 65 or in equal annual installments over five,
10 or 15 years (including interest). Under IRS rules, distributions to so-called key employees (as defined by the IRS in regulations concerning Code Section 409A) on account of separation from service may not commence earlier than six months from the key employees separation from service. Payments under the SERP will be delayed if necessary to meet this requirement. In the case of death, the Pension SERP Benefit that vests on or after January 1, 2005 is distributed as a lump sum within 90 days of such event.
Pension SERP Benefits that vested prior to January 1, 2005 are generally distributed after separation from service (other than retirement) in the form of a single life annuity commencing at age 65. In the case of retirement, the vested pre-2005 Pension SERP Benefit is combined with the vested pre-2005 Thrift/401(k) SERP Benefit and is paid out in the form of a single life annuity payable at age 65 (or in a series of equal installments over 15 years commencing with retirement if actuarial estimates indicate that payment form would yield a longer period of payment). In the case of death, the vested pre-2005 Pension SERP Benefit is paid in the form of a lump sum within 90 days of such event.
Non-qualified Deferred Compensation
Executive Deferred Compensation Plan
The Executive Deferred Compensation Plan allows the named executive officers to defer receipt of a portion of their annual salary and cash bonus (and to defer settlement of RSUs granted between 2002 and 2007). The Executive Deferred Compensation Plan is a non-qualified plan and is unfunded (benefits are paid from the companys general assets). The plan was amended and restated effective January 1, 2008. Pursuant to the amended and restated plan, deferrals may be made for a period of whole years as elected by the employee, but in no event past termination of employment. Deferred amounts are credited with interest, which is currently the prime rate as reported by the Wall Street Journal as of the first business day of the applicable calendar year, plus 1%. When employees make deferral elections for a particular year, they also specify the form in which the deferral will be distributed after the expiration of the election. The available selections are lump sum or reasonably equal installments over five, ten or fifteen years. A six-month delay in commencement of distributions on account of separation from service applies to key employees, in accordance with Code Section 409A. Hardship withdrawals are permitted in certain limited circumstances.
On October 8, 2008, we amended the Executive Deferred Compensation Plan to permit participants to make a one-time election by October 31, 2008 to change the timing and form of the distribution of their existing non-equity balances in the Executive Deferred Compensation Plan. Messrs. Kain, Kellermann and George elected new in-service distributions that are scheduled to be paid in three installments in March 2009, December 2009 and May 2010. Mr. Kellermanns account balance will be distributed as a lump sum to his named beneficiary. Mr. Kain will receive his distribution based on the secondary elections he made at the time he deferred his pay. None of the other named executive officers made deferral elections under the Executive Deferred Compensation Plan.
Supplemental Executive Retirement Plan Thrift/401(k) SERP Benefit
The Thrift/401(k) SERP Benefit component of the SERP is an unfunded, nonqualified defined contribution plan designed to provide participants with the full amount of benefits that they would have been entitled to under the Thrift/401(k) Savings Plan if that plan (1) was not subject to certain limits on compensation that can be taken into account under the Code and (2) did not exclude from compensation amounts deferred under our Executive Deferred Compensation Plan. For example, in 2008 under the Code, only the first $230,000 of an employees compensation is considered when determining the companys percentage-based matching contribution and any discretionary basic contribution for any participant in the Thrift/401(k) Savings Plan. We believe the Thrift/401(k) SERP Benefit is an appropriate benefit because offering such a benefit helps us remain competitive with companies in the Comparator Group.
The Thrift/401(k) SERP Benefit equals the amount of the employer matching contributions and basic contribution for each named executive officer that would have been made to the Thrift/401(k) Savings Plan during the year, based upon the participants eligible compensation, without application of the above limits, less the amount of the matching contributions and basic contribution actually made to the Thrift/401(k) Savings Plan during the year. Participants are credited with earnings or losses in their Thrift/401(k) SERP Benefit accounts based upon each participants individual direction of the investment of such notional amounts among the virtual investment funds available under the SERP. Such investment options are based upon and mirror the performance of those investment options available under the Thrift/401(k) Savings Plan. As of December 31, 2008, there were 21 investment options in which participants notional amounts could be invested.
To be eligible for the Thrift/401(k) SERP Benefit, the named executive officer must be eligible for matching contributions and basic contributions under the Thrift/401(k) Savings Plan for part of the year. Additionally, to be eligible for the portion of the Thrift/401(k) SERP Benefit attributable to employer matching contributions, the named executive officer must contribute the maximum amount permitted under the terms of the Thrift/401(k) Savings Plan on a pre-tax basis throughout the entire portion of the year in which the named executive officer is eligible to make such contributions. That portion of the Thrift/401(k) SERP Benefit is vested when accrued, while the accrual relating to the basic contribution paid prior to 2008 is subject to five-year cliff vesting, and the accrual relating to the basic contribution paid in 2008 and later years is subject to five-year graded vesting of 20 percent per year. For amounts vesting on or after January 1, 2005, the Thrift/401(k) SERP Benefit is distributed as a lump sum payable 90 days after the end of the calendar year in which separation from service occurs. In the case of death, the Thrift/401(k) SERP Benefit that vests on or after January 1, 2005 is paid in the form of a lump sum within 90 days of such event.
Thrift/401(k) SERP Benefits that vested prior to January 1, 2005 are generally distributed after separation from service (other than retirement) in the form of three reasonably equal annual installments, starting in the first quarter of the calendar year following the year in which the separation from service occurs. In the case of retirement, the vested pre-2005 Thrift/401(k) SERP Benefit is combined with the vested pre-2005 Pension SERP Benefit and is payable in the form of a single life annuity at age 65 (or in a series of equal installments over 15 years commencing with retirement if actuarial estimates indicate that this payment form would yield a longer period of payment). In the case of death, the vested pre-2005 Thrift/401(k) SERP Benefit is paid in the form of a lump sum within 90 days of such event.
The following table shows the contributions, earnings, withdrawals and distributions, and accumulated balances under the Thrift/401(k) SERP Benefit for each named executive officer and the Executive Deferred Compensation Plan, or EDCP, for Messrs. Kellermann, George and Kain (as the only participating named executive officers) as of December 31, 2008.
The aggregate balances shown for Messrs. Syron and Piszel and Ms. Cook reflect reductions in the amount of $207,000, $37,788 and $124,369, respectively, to correct for over-accruals that occurred inadvertently during 2007 and 2008 under the Thrift/401(k) SERP Benefit. These excess accruals were deducted from the account of each of these executives before any SERP benefit amount had been paid to such officers. In addition, excess accruals covering a total of 104 other current and former officers (including Messrs. Bostrom, George, Kellermann and Kain) have been identified. In most cases, the accrual will also be recovered by the company by reversing the excess accrual from the officers balance. However, in 20 of these cases, SERP benefits that included excess accrual amounts were paid to terminated officers after their departure but before the over-accrual was discovered. The company has requested repayment of all excess amounts (which total $173,154) from these individuals.
The following 2007 and 2006 Thrift/401(k) SERP Benefit accrual amounts were reported in the column All Other Compensation in the 2007 and 2006 Summary Compensation Tables as compensation for each named executive officer for whom such accruals were made during such years, as follows: (i) Mr. Syron: 2007 $327,575, 2006 $229,375; (ii) Mr. Piszel: 2007 $2,438, 2006 $0; and (iii) Ms. Cook: 2007 $209,200, 2006 $96,250. The amounts shown for 2007 reflect the correction of over-accruals discussed in the preceding paragraph.
No above-market earnings under the EDCP were reported in the 2007 and 2006 Summary Compensation Table for Messrs. Syron and Piszel and Ms. Cook, since they did not defer any compensation under the EDCP during those years.
Potential Payments Upon Termination or Change in Control
We have entered into certain employment agreements or offer letters and maintain certain plans that will require us to provide compensation to our named executive officers in the event of a termination of employment or a change in control of Freddie Mac. The compensation and benefits potentially payable to each named executive officer if the officer had terminated his employment under various circumstances as of December 31, 2008 are reported in the discussion and tables below. For more information, see Employment and Separation Agreements below. FHFA reviewed the terms of the employment and separation agreements for Messrs. Kain, Syron and Piszel and Ms. Cook and approved the termination benefits set forth therein at the time the company entered into these agreements. The Director of FHFA subsequently made a determination that the termination benefits contemplated under the agreements for Messrs. Syron and Piszel are golden parachute payments and should not be paid. Ms. Cook also received no severance benefits. FHFA determined that Freddie Mac would not provide any termination benefits contemplated by Mr. Kains employment agreement. See Other Executive Compensation Considerations Is There Any Regulatory Oversight of Our Compensation Process for Named Executive Officers?
We also have a corporate severance policy. Under this policy, executive officers would typically receive severance benefits in an amount equal to one years base salary as long as their separation is in connection with events that do not evidence gross misconduct. Severance and all other forms of termination benefits for executive officers, including all of the named executive officers, must be approved by FHFA.
Each of our named executive officers other than Mr. Moffett is subject to a restrictive covenant and confidentiality agreement with us. The standard agreement provides that the executive officer will not seek employment with one of our competitors in the 12 months immediately following termination of his or her employment with us, regardless of whether the executives employment is terminated by the executive, by us, or by mutual agreement. During that same 12-month period, each executive also agrees not to solicit or recruit any of our managerial employees. The agreement provides for continued confidentiality of information about us that constitutes trade secrets or proprietary or confidential information. In the case of Mr. Syron, the terms of his employment agreement provided for a non-competition period of two years following the termination of his employment with us, rather than the standard 12 months. In the case of Mr. Kain, the terms of his employment agreement provided for a non-competition period of either 24, 6 or 3 months depending on the competitor specified in this Agreement. Mr. Moffett resigned from the company prior to entering into an employment agreement or a restrictive covenant and confidentiality agreement with us.
As of December 31, 2008, only Messrs. Kellermann, Kain and Syron had vested in their benefits under the Pension Plan and the Pension SERP benefit. The amounts presented in the tables later in this section do not include vested RSU or stock option awards, vested balances in the Thrift/401(k) SERP Benefit or the Executive Deferred Compensation Plan or vested benefits in the Pension SERP Benefit as of December 31, 2008, because such vesting was not in connection with a termination or change in control. Amounts shown in the tables also do not include certain items available to all employees generally upon a termination event.
For RSUs, the value shown in the tables is calculated on a grant-by-grant basis by multiplying the number of unvested RSUs by the closing price of our common stock on December 31, 2008. No value is included in the tables for stock options because the exercise price for all such options held by named executive officers exceeds the closing price of our common stock on December 31, 2008.
Alternative Settlement Provisions of Equity Awards in the Event of Certain Terminations
The RSUs awarded to our employees, including the named executive officers, provide for alternative settlement provisions in the event of certain terminations, as follows:
The stock options granted to our employees, including the named executive officers, include alternative settlement provisions in the event of certain terminations which are similar to the provisions for RSUs, with the following modifications:
The provisions above applicable to both RSUs and stock options are not applicable to the awards granted to Mr. Kain, as his employment agreement and the subsequent order of FHFA govern the treatment of his long-term equity awards. See Employment and Separation Agreements Gary D. Kain.
David M. Moffett
As of December 31, 2008, Mr. Moffett had not been provided with any post-termination benefits. During his employment, Mr. Moffett received a base salary of $900,000 per year, prorated for the time he was employed by Freddie Mac. Mr. Moffett resigned his employment with Freddie Mac effective March 13, 2009.
Richard F. Syron
On December 6, 2003, we entered into an employment agreement with Mr. Syron which provided for his employment as Chairman and Chief Executive Officer, effective December 31, 2003. The agreement, which had an initial term of five years, was amended on November 9, 2007 to extend the term of the agreement until September 2009. On September 7, 2008, our Conservator terminated Mr. Syrons employment, effective November 7, 2008. On September 14, 2008, our Conservator determined that the severance and certain other payments provided for in Mr. Syrons agreement were golden parachute payments and should not be paid. However, pursuant to Mr. Syrons employment agreement, vested stock options continue to remain exercisable for three years following his termination date.
Anthony S. Piszel
Mr. Piszel joined us as our Executive Vice President and Chief Financial Officer on November 13, 2006. On September 22, 2008, Mr. Piszel was terminated without cause as a result of a determination by our Conservator. Our Conservator also determined that severance payments (including any post-termination salary, any annual bonus for 2008 and any further vesting of stock grants) provided for in Mr. Piszels employment agreement were golden parachute payments and should not be paid.
Patricia L. Cook
Ms. Cook joined us in August 2004. Ms. Cooks position as Executive Vice President Chief Business Officer was eliminated in connection with certain management and organizational changes and her employment was terminated effective November 17, 2008. Ms. Cook received no severance benefits. All of Ms. Cooks unvested stock options and restricted stock units were cancelled on her termination date.
Kirk S. Die
Mr. Die joined us as Senior Vice President General Auditor on April 17, 2006. We entered into a separation agreement with Mr. Die effective May 9, 2008 pursuant to which Mr. Die received the following:
Under the terms of this separation agreement, Mr. Die remains subject to non-competition and non-solicitation restrictions for one year following his termination of employment with us.
Gary D. Kain
Mr. Kain voluntarily resigned his employment with Freddie Mac effective January 20, 2009. As discussed further in Employment and Separation Agreements Gary D. Kain, his employment agreement includes provisions that address the obligations of the parties in the event that Mr. Kain terminates his employment for any reason at any time in calendar year 2009. The amounts reported in the table below reflect the payments called for under the terms of the employment agreement in the event that each of the types of terminations listed had occurred on December 31, 2008. However, as noted above (see Compensation Discussion and Analysis What Written Agreements Do We Have That Provide for the Continued Employment of Our Named Executive Officers), FHFA has determined that none of the termination benefits provided for under the agreement with Mr. Kain would be made, and that no further benefits would be provided to him in connection with performance-based bonus awards, unpaid cash retention awards and further vesting of stock grants.
David B. Kellermann
The following table describes the potential payments as of December 31, 2008 upon termination for David B. Kellermann, our former Acting Chief Financial Officer. Mr. Kellermann died on April 22, 2009.
Robert E. Bostrom
The following table describes the potential payments as of December 31, 2008 upon termination for Robert E. Bostrom, our Executive Vice President General Counsel & Corporate Secretary.
Paul G. George
The following table describes the potential payments as of December 31, 2008 upon termination for Paul G. George, our Executive Vice President Human Resources & Corporate Services.
Employment and Separation Agreements
The employment agreements or offer letters described below for Messrs. Bostrom, George, Kain and Die are attached as exhibits to this amendment on Form 10-K/A. For information on the termination provisions in Mr. Kains employment agreement, as well as certain information about compensation agreements we entered into with Messrs. Syron, Piszel and Die and Ms. Cook, see Potential Payments Upon Termination or Change in Control above.
We did not have an employment agreement with Mr. Moffett prior to his resignation or with Mr. Kellermann prior to his death. We entered into an employment agreement with Mr. Kain in November 2005; the offer letters with Mr. George, Mr. Bostrom and Mr. Die (described below) were entered into in July 2005, January 2006 and March 2006, respectively. Some employment agreements and offer letters contain minimum guarantees with respect to base pay, bonus, and long-term equity awards, as well as special provisions applicable upon termination, although none of these provisions are currently effective. The CHRC and management considered the executive protections (such as guaranteed bonuses and special termination benefits) provided by each of these arrangements necessary in order to achieve our goal of recruiting and retaining executive officers.
The employment agreement or offer letter for Messrs. Die, Kain, Bostrom and George (described below) set their respective base salaries, minimum or guaranteed bonus opportunities and minimum or guaranteed long-term equity award opportunities. The amounts provided for in these agreements for years prior to 2008 are not included in this discussion because the company has no continuing obligations thereunder.
Kirk S. Die
Freddie Mac entered into an offer letter with Mr. Die dated March 11, 2006. The letter established Mr. Dies base salary for 2006, subject to review and adjustment as part of Freddie Macs normal performance appraisal process. It also provided him with a target bonus for 2006 performance (payable in 2007) equal to 70% of his base salary; a target long-term incentive award in 2006 equal to 70% of his base salary; and a sign-on bonus consisting of cash and RSUs.
The offer letter included a requirement that Mr. Die repay the cash sign-on bonus he received if, within the first year after his employment by Freddie Mac: (i) he terminated his employment for any reason; (ii) Freddie Mac terminated his employment due to violation of certain conduct standards; or (iii) the Audit Committee determined that his performance was unacceptable. The one-year period specified in Mr. Dies offer letter expired in March 2007. Because Mr. Die remained employed by Freddie Mac at that time, no such amounts were repaid in connection with his sign-on bonus.
Mr. Dies employment with Freddie Mac terminated effective May 9, 2008. In connection with such termination, Mr. Die entered into a general release of claims, and Freddie Mac agreed to provide Mr. Die with certain compensation and benefits, including the following (which were approved by OFHEO as part of its ongoing review of executive termination benefits):
Gary D. Kain
Mr. Kain entered into an employment agreement with Freddie Mac dated November 22, 2005. With respect to Mr. Kains performance during 2005, the agreement guaranteed a cash bonus in the amount of $2,350,000 and a supplemental RSU award in the amount of $400,000. With respect to Mr. Kains performance during each of 2006, 2007 and 2008, the agreement guaranteed him $3,000,000 minimum total annual compensation consisting of a base salary of no less than $600,000; a cash bonus of no less than $1,200,000 and a target amount of $2,200,000 payable no later than April 30 of the calendar year following the end of each performance year; and a long-term incentive award of no less than $1,200,000 payable no later than June 30 of the calendar year following the end of each performance year. The three-year term of the agreement expired on December 31, 2008.
The agreement contained provisions that established the rights and obligations of the parties under several different termination scenarios. Mr. Kain voluntarily resigned his employment with Freddie Mac effective January 20, 2009, which is after the December 31, 2008 term of the agreement. The discussion below describes the agreement provision applicable to this circumstance. The agreement is filed as an exhibit to this amendment on Form 10-K/A.
The agreement provided that if Mr. Kain terminated his employment for any reason at any time in calendar year 2009, Freddie Mac would pay Mr. Kain an amount for 2008 which, when added to certain other amounts previously paid to him with respect to 2008, would, as in each of 2006 and 2007, bring the total compensation paid to him for 2008 to $3,000,000. The agreement also provided for the continued vesting (in accordance with the original vesting schedule) of all options and RSUs that were granted to him as long-term incentive compensation more than one year prior to the date of his termination, subject to certain forfeiture provisions in the event he violates the non-competition or non-solicitation terms of the agreement.
Pursuant to its authority to review termination payments to executive officers of Freddie Mac, FHFA has reviewed these provisions of Mr. Kains agreement and ordered that none of the payments provided for under the agreement with Mr. Kain be made, and that no further benefits be provided to him in connection with performance-based bonus awards, unpaid cash retention awards and further vesting of stock grants.
Robert E. Bostrom
Freddie Mac entered into an offer letter with Mr. Bostrom dated January 24, 2006. The letter established Mr. Bostroms base salary for 2006, subject to review and adjustment as part of Freddie Macs annual performance management processes. It also provided him with a bonus at a targeted level equal to 116% of his base salary with a guaranteed minimum amount for 2006 performance (payable in 2007); a long-term incentive award at a targeted level equal to 133% of his base salary with a guaranteed minimum amount in 2006; and a sign-on bonus consisting of cash and RSUs.
The offer letter for Mr. Bostrom included a requirement that he repay a pro rata portion of the cash sign-on bonus he received if, within the first two years after his employment by Freddie Mac, he terminated his employment for any reason or Freddie Mac terminated his employment due to Gross Misconduct (as defined in Freddie Macs officer severance policy) or violation of certain conduct standards. Mr. Bostroms offer letter also included a provision obligating Freddie Mac to pay him a termination benefit if, within the first two years after his employment by Freddie Mac, Freddie Mac terminated his employment for any reason other than Gross Misconduct or violation of certain conduct standards. Both the repayment obligation regarding the sign-on bonus and the termination benefit were subject to reduction on a pro rata basis over the two-year period covered by the letter. The two-year period specified in Mr. Bostroms offer letter expired in January 2008. Because Mr. Bostrom remained employed by Freddie Mac when this two-year period expired, no amounts were repaid or will be payable in the future by him in connection with his sign-on bonus, and no part of his termination benefit under the offer letter will be paid.
Paul G. George
Freddie Mac entered into an offer letter with Mr. George dated July 28, 2005. The letter established Mr. Georges base salary for 2005, subject to review and adjustment as part of Freddie Macs annual performance management processes. It also provided him with a bonus at a targeted level equal to 100% of his bonus-eligible earnings with a guaranteed minimum amount for 2005 performance (payable in 2006); a long-term incentive award in 2006 at a targeted level equal to 250% of his base salary; and a sign-on bonus consisting of cash and RSUs.
The offer letter for Mr. George included a requirement that he repay a pro rata portion of the cash sign-on bonus he received if, within the first year after his employment by Freddie Mac, he terminated his employment for any reason or Freddie Mac terminated his employment due to Loss of Confidence (as defined in Freddie Macs officer severance policy) or violation of certain conduct standards. Because Mr. George remained employed by Freddie Mac when this one-year period expired, no amounts were repaid or will be payable in the future by him in connection with his sign-on bonus.
As a result of the conservatorship, Board compensation for 2008 covers two time periods: January 1, 2008 through September 15, 2008 (Before Conservatorship) and September 16, 2008 through December 31, 2008 (During Conservatorship).
Before Conservatorship: The Board reviewed compensation for our non-employee directors on an annual basis. The Board believed that director compensation should be weighted toward stock-based compensation to enhance alignment with the interests of our stockholders. For 2008, all stock-based compensation for non-employee directors was in the form of RSU grants.
Cash compensation consisted of annual retainers and meeting fees. The directors could elect to receive their compensation either in the form of cash or stock, paid currently or deferred to be paid at a later date. These forms of payment are discussed further below. Retainers were pro-rated based on the quarter in which a director joined the Board.
During Conservatorship: After we entered conservatorship, FHFA approved compensation for Board members in the form of cash retainers only, paid on a quarterly basis. The compensation for Mr. Koskinen was effective as of September 16, 2008, the date of his appointment as non-executive Chairman, and the compensation for the other non-executive directors was effective as of December 18, 2008. Retainers are pro-rated from the date of the directors appointment to the Board. No payments were made to Ms. Alexander or Messrs. Glauber or Retsinas for the period from September 6, 2008 (when we entered conservatorship) until December 18, 2008 (the effective date of the appointment of the post-conservatorship directors). Mr. Koskinen and Mr. Glauber continue to receive the annual retainers indicated in the table below under the During Conservatorship column reflecting their roles on the Board prior to assuming their interim positions, and they are not receiving any additional compensation in their interim positions. If their interim service lasts longer than currently anticipated, the Board may consider whether additional compensation is appropriate.
Under the terms of the Purchase Agreement, we are prohibited from making stock grants to directors during the existence of that agreement.
We do not currently have any pension or retirement plans for directors, nor did we have such plans before conservatorship. In addition, both before conservatorship and during conservatorship, non-employee directors were and are reimbursed for reasonable out-of-pocket costs for attending each meeting of the Board or a Board committee of which they are a member.
Board compensation both before and during conservatorship is shown in the table below.
2008 Non-Employee Director Compensation Levels
Cash Compensation Elections Before Conservatorship. Prior to conservatorship, directors could elect to defer receipt of cash fees and stock awards, as well as to convert cash fees into stock under the 1995 Directors Stock Compensation Plan, or the Directors Plan, and the Directors Deferred Compensation Plan, an unfunded, non-qualified plan. Deferred cash was credited to a directors account as of the date the amounts would have otherwise been paid to the director. For 2008, five pre-conservatorship directors elected to defer all or a portion of their 2008 cash fees into deferred stock or common stock. In February 2009, the Nominating and Governance Committee, which oversees Board compensation, amended the Directors Deferred Compensation Plan and suspended further deferrals.
Subject to earlier payment in the event of hardship withdrawals, deferred cash compensation distributions were payable in lump sums at the earlier to occur of (i) the end of the deferral period or (ii) the earlier of a directors termination of membership on the Board, disability or death.
Equity Compensation. Prior to conservatorship, non-employee directors received stock-based compensation under the Directors Plan in the form of RSUs. The number of RSUs awarded to non-employee directors was calculated by dividing the dollar amount of the award by the fair market value of our common stock on the grant date. Fair market value is defined under the Directors Plan as the closing sales price of a share of our common stock reported for such date. For RSU grants made beginning March 3, 2007, vesting occurred in four equal increments with 25% vesting on each anniversary date of the grant, unless vesting was accelerated under certain circumstances, including death, disability or retirement from the Board. For equity grants outstanding as of December 31, 2006, vesting with respect to both stock options and RSUs occurred in equal increments over four terms on the Board, with 25% vesting at the end of every term of office, unless vesting was accelerated under certain circumstances, including death, disability or retirement from the Board.
Dividend equivalents on RSUs granted to our non-employee directors were accrued as additional RSUs and were generally settled at the same time as the underlying RSUs. However, unlike the underlying RSUs, the dividend equivalents on RSUs were not subject to a vesting schedule and were settled upon termination of Board service irrespective of whether the underlying RSUs vested. A director forfeited unvested RSUs upon a termination other than for death, disability or retirement. Retirement for purposes of the Directors Plan was a termination resulting from the directors attainment of 72 years of age or ten consecutive terms in office. In 2008, Shaun OMalley retired from the Board. However, none of the director resignations from the Board in September 2008 were treated as a retirement under the Directors Plan.
Effective as of January 1, 2006, we stopped granting dividend equivalents on awards of stock options to non-employee directors. Prior to January 1, 2006, however, stock options granted to our non-employee directors had dividend equivalent rights on each share underlying the option equal to the dividend per share declared and paid on our outstanding common stock. For stock options vested as of December 31, 2004, dividend equivalents were accrued and were payable in cash upon exercise or expiration of the option. In response to Section 409A of the Code, the former CHRC eliminated the accrual of dividend equivalents on stock option grants or portions thereof that were outstanding on December 31, 2005 but not vested as of December 31, 2004. Dividend equivalents accrued through December 31, 2005 with respect to these stock options were distributed in a lump sum in 2006. Thereafter, dividend equivalents with respect to these stock options were distributed as soon as practicable after dividends on our common stock were declared.
Non-Employee Director Stock Ownership Guidelines. Prior to conservatorship, non-employee directors generally were expected to hold an investment of at least five times the annual Board retainer in our common stock within five years after joining the Board, unless the former GNROC determined that it was unduly burdensome for a director to make such an investment. In February 2009, the Board eliminated the stock ownership guidelines because we had ceased paying directors stock-based compensation.
The following table summarizes the 2008 compensation provided to all persons who served as non-employee directors during 2008.
2008 Director Compensation
The amounts shown in the Stock Awards and Option Awards columns of the 2008 Director Compensation Table represent amounts recognized as equity awards expense for financial statement reporting purposes in accordance with SFAS No. 123(R), which are primarily based on the trading price of our common stock on the date of grant for RSUs and the fair value of options estimated using a Black-Scholes option pricing model. Accordingly, the values shown are significantly higher than the value ultimately realized on these awards by our directors, especially for 2008. The following table provides a comparison of 2008 total compensation for all persons who served as non-employee directors, as reported in the 2008 Director Compensation table, with a recalculated amount that reflects the value of RSUs (and the related dividend equivalent units) that vested during 2008, based on the closing market price on the vesting dates, respectively. The adjusted amounts presented in the second column below differ substantially from the amounts presented in the 2008 Director Compensation table required by the SEC and are not substitutes for those amounts.
The only difference between total compensation as reported in the 2008 Director Compensation Table and the adjusted amount presented above is the treatment of stock and option awards. The amounts reported in the 2008 Director Compensation Table represent the expense recognized for financial statement reporting purposes with respect to equity awards outstanding at any point in 2008 (including unvested awards granted in previous years). The stock and option award amounts included in the second column above reflect the value for RSUs that vested during 2008, based on the closing price of our common stock on the vesting date. That price is multiplied by the number of RSUs that vested. No value is included for stock options, as no vested and exercisable options were exercised during 2008 by the outside directors, nor is the exercise price of any options less than the closing price of our common stock on December 31, 2008. Messrs. Glauber and Retsinas have deferred the vesting of all RSUs received since
they joined the Board. Therefore, the amounts reported under the Total column for Messrs. Glauber and Retsinas in the table above include only Fees Earned or Paid in Cash, and All Other Compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Our only class of voting stock is our common stock. The following table shows the beneficial ownership of our common stock as of April 1, 2009 by our current directors, our named executive officers (identified in the Summary Compensation Table under Item 11 above), all of our directors and executive officers as a group, and holders of more than 5% of our common stock. Beneficial ownership is determined in accordance with SEC rules for computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person. As of April 1, 2009, each director and named executive officer, and all of our directors and executive officers as a group, owned less than 1% of our outstanding common stock. The information presented below is based on information provided to us by the individuals or entities specified in the table.
Stock Ownership by Directors, Executive Officers and Greater Than 5% Holders
As of April 1, 2009
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information about our common stock that may be issued upon the exercise of options, warrants and rights under our existing equity compensation plans at December 31, 2008. Our stockholders have approved the ESPP, the 2004 Employee Plan, the 1995 Employee Plan and the Directors Plan. We suspended the operation of these plans following our entry into conservatorship and are no longer granting awards under such plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Policy Governing Related Person Transactions
The Board has adopted a written policy governing the Approval of Related Person Transactions, or the Related Person Transactions Policy. This policy sets forth procedures for the review and approval or ratification of transactions involving related persons, which consist of any person who is, or was at any time since the beginning of the companys last completed fiscal year, a director, a director nominee, an executive officer, or an immediate family member of any of the foregoing persons.
Under authority delegated by the Board, the Executive Vice President General Counsel & Corporate Secretary, or the General Counsel, and the Nominating and Governance Committee (or its Chair under certain circumstances) (each, an Authorized Approver) are responsible for applying the Related Person Transactions Policy. Transactions covered by the Related Person Transactions Policy consist of any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships, in which (i) the aggregate amount involved exceeded or is expected to exceed $120,000; (ii) the company was or is expected to be a participant; and (iii) any related person had or will have a direct or indirect material interest. The Related Person Transactions Policy includes a list of categories of transactions identified by the Board as having no significant potential for an actual conflict of interest or the appearance of a conflict or improper benefit to a related person, and thus not subject to review.
The companys Legal Division will assess whether any proposed transaction involving a related person is covered by the Related Person Transactions Policy. If so, the transaction will be reviewed by the appropriate Authorized Approver. In consultation with the Chair of the Nominating and Governance Committee, the General Counsel may refer any proposed transaction to the Nominating and Governance Committee for review and approval.
If possible, approval of a related person transaction will be obtained prior to the effectiveness or consummation of the transaction. If advance approval of a related person transaction by the appropriate Authorized Approver is not feasible or otherwise not obtained, then the transaction will be considered promptly by the appropriate Authorized Approver to determine whether ratification is warranted.
In determining whether to approve or ratify a related person transaction covered by the Related Person Transactions Policy, the appropriate Authorized Approver will review and consider all relevant information which may include: (i) the nature of the related persons interest in the transaction; (ii) the approximate total dollar value of, and extent of the related persons interest in, the transaction; (iii) whether the transaction was or would be undertaken in the ordinary course of business of the company; (iv) whether the transaction is proposed to be, or was, entered into on terms no less favorable to the company than terms that could have been reached with an unrelated third party; and (v) the purpose, and potential benefits to the company, of the transaction.
Corporate Governance Guidelines
In February 2009, the Board adopted revised Corporate Governance Guidelines, or the Guidelines, which are available on our website at www.freddiemac.com/governance/pdf/gov_guidelines.pdf. Printed copies of the Guidelines also are available to any stockholder upon request to the Corporate Secretary at the address specified above under Communications with Directors.
The non-employee members of the Board have determined that:
FHFA, as Conservator, previously made the same determinations regarding the current directors and Mr. Moffett in December 2008, except that Mr. Koskinen, who was then serving as Non-Executive Chairman, was determined to be independent.
Transactions with 5% Shareholders
Treasury beneficially owns more than 5% of the outstanding shares of our common stock by virtue of the warrant we issued to Treasury on September 7, 2008. The warrant entitles Treasury to purchase shares equal to 79.9% of our outstanding common stock on the date of exercise. We issued the warrant pursuant to the terms of the Purchase Agreement we entered into with Treasury on September 7, 2008. Under the Purchase Agreement, we also issued to Treasury one million shares of senior preferred stock. We issued the warrant and the senior preferred stock as an initial commitment fee in consideration of Treasurys commitment to provide up to $100 billion in funds to us under the terms and conditions set forth in the Purchase Agreement. On February 18, 2009, Treasury announced that it is amending the Purchase Agreement to increase its funding commitment to $200 billion and to revise some of the covenants in the agreement. In November 2008, we received $13.8 billion from Treasury under the Purchase Agreement, and in March 2009 we received an additional $30.8 billion. We also entered into the Lending Agreement with Treasury under which we can request loans from Treasury through December 31, 2009. See Part I Item 1 Business Conservatorship and Related Developments Treasury Agreements of our Form 10-K for more information about the Purchase Agreement, the warrant and the Lending Agreement.
On September 7, 2008, Treasury also announced the GSE mortgage-backed securities purchase program under which Treasury conducts open market purchases of mortgage-backed securities issued by us and Fannie Mae. Treasurys authority to purchase these mortgage-backed securities expires on December 31, 2009. As of January 31, 2009, according to information provided by Treasury, it held $94.2 billion of GSE mortgage-related securities under this program. See Part I Item 1 Business Conservatorship and Related Developments Treasury Agreement of our Form 10-K.
On February 18, 2009, the Obama Administration announced the Homeowner Affordability and Stability Plan, or HASP. In addition to participating in initiatives under HASP, we will play a role in administering the HASP on behalf of Treasury. On February 18, 2009, we entered into a Financial Agency Agreement with Treasury to assist Treasury in designing a standardized, streamlined mortgage loan modification program and to monitor servicer performance under the program. Treasury will reimburse us for the expenses we incur in connection with providing these services. See Part I Item 1 Business Conservatorship and Related Developments Homeownership Affordability and Stability Plan Compliance Agent of our Form 10-K. FHFA, as conservator, approved the Purchase Agreement, the Lending Agreement and our administrative role in HASP. The remaining transactions described above did not require review and approval under any of our policies and procedures relating to transactions with related persons.
Transactions with Institutions Related to Directors
In the ordinary course of business, we were a party during 2008, and expect to continue to be a party during 2009, to certain business transactions with institutions affiliated with members of our Board. Management believes that the terms and conditions of the transactions were no more and no less favorable to us than the terms of similar transactions with unaffiliated institutions to which we are, or expect to be, a party. Those transactions that are required to be disclosed under SEC rules are described below.
Jerome P. Kenney was a director in 2008. Mr. Kenney retired as Vice Chairman of Merrill Lynch & Co., or Merrill Lynch, in January 2008. During his tenure as director, Mr. Kenney acted as an independent consultant to Merrill Lynch. While at Merrill Lynch, Mr. Kenney served in many capacities and most recently was a member of Merrill Lynchs Executive Client Coverage Group. Effective January 1, 2009, Merrill Lynch was acquired by Bank of America Corp. Mr. Kenney no longer serves on our Board of Directors. Mr. Kenneys consulting arrangement with Merrill Lynch expired on December 31, 2008 and has not been renewed. He has informed us that he has no relationship with Bank of America. Since January 1, 2008, and through the effective date of the acquisition of Merrill Lynch by Bank of America, Merrill Lynch through its subsidiaries, has participated in the following transactions with Freddie Mac:
Freddie Mac regularly purchased securities from Merrill Lynch, and continues to purchase securities from Bank of America, for its mortgage-related investment portfolio and its non-mortgage securities investment portfolio and occasionally may sell mortgage-related securities to or through Bank of America (and formerly Merrill Lynch).
Treasury and the Board of Governors of the Federal Reserve System have taken a number of actions to support us during conservatorship, including entering into the Purchase Agreement and the Lending Agreement, each described in our Form 10-K. See Part I Item 1 Business Conservatorship and Related Developments Overview of Treasury Agreements and Part I Item 1 Business Conservatorship and Related Developments Treasury Mortgage-Related Securities Purchase Program and Federal Reserve Debt and Mortgage-Related Securities Purchase Program.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Description of Fees(1)
The following is a description of fees billed to us by PricewaterhouseCoopers LLP during 2008 and 2007.
Approval of Independent Auditor Services and Fees
As provided in its charter, the Audit Committee appoints our independent public accounting firm, subject to FHFA approval, reviews the scope of the annual audit and pre-approves, subject (as required) to FHFA approval, all audit and non-audit services permitted under applicable law to be performed by the independent public accounting firm. The Audit Committee has evaluated the performance of PricewaterhouseCoopers LLP and has, with the approval of FHFA, appointed them as our independent public accounting firm for fiscal year 2009.
The Sarbanes-Oxley Act and related rules adopted by the SEC require that all services provided to companies subject to the reporting requirements of the Exchange Act by their independent auditors be pre-approved by their audit committee or by authorized members of the committee, with certain exceptions. The Audit Committees charter requires that the Audit Committee pre-approve any audit services, and any non-audit services permitted under applicable law, to be performed by our independent auditors (or to designate one or more members of the Audit Committee to pre-approve such services and report such pre-approval to the Audit Committee).
Audit services that are within the scope of an auditors engagement approved by the Audit Committee prior to the performance of those services are deemed pre-approved and do not require separate pre-approval. Audit services not within the scope of an Audit Committee-approved engagement, as well as permissible non-audit services, must be separately pre-approved by the Audit Committee.
When the Audit Committee pre-approves a service, the Audit Committee typically sets a dollar limit for such service. Management endeavors to obtain pre-approval of the Audit Committee, or of the Chairman of the Audit Committee (when the Chairman of the Audit Committee has been delegated such authority), before it incurs fees exceeding the dollar limit. If the Chairman of the Audit Committee approves the increase, the Chairman will report such approval at the Audit Committees next scheduled meeting.
The pre-approval procedure is administered by our senior financial management, which reports throughout the year to the Audit Committee. The Audit Committee pre-approved all audit and audit-related services performed in 2007 or 2008.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The consolidated financial statements required to be filed in our annual report on Form 10-K are included in Part II, Item 8 of our Form 10-K filed on March 11, 2009.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Federal Home Loan Mortgage Corporation
Date: April 30, 2009
/s/ John A. Koskinen
John A. Koskinen
Interim Chief Executive Officer