For FHLB’s sake | FT Alphaville

For FHLB’s sake


Free Hubris Loans for Banks.

Find Huge Lumps of Bucks.

Or, simply, the Federal Home Loan Banks, one of the biggest providers of funding for US mortgages — and it may be in trouble. From Bloomberg:

The Federal Home Loan Banks face potentially “substantial” losses on mortgage bonds, and in a worst-case scenario only four of the 12 would remain above regulatory capital minimums, Moody’s Investors Service said.

The FHLBs, government-chartered cooperatives owned by U.S. financial companies, hold about $76.2 billion of “private- label” mortgage securities that may cause losses under accounting rules, the New York-based ratings firm said in a statement today. Moody’s said it is unlikely to lower the system’s Aaa debt grades because of their government support.

Disregarding that there seems to be something instinctively distasteful about giving a company a triple-A rating based on the fact the government will bail it out, it’s troublesome for another reason. As noted above, the US government pledged to backstop the FHLB when it rescued Fannie and Freddie in September.

Like Fannie and Freddie, the FHLB are Government-Sponsered Enterprises, but, rather than provide loans to individuals they provide loans to something like 8,000 banks, helping them finance their mortgage holdings. As the credit crunch took hold and private investors shied away from lending to banks, the FHLB became more important, culminating in the organisation’s current $1.25 trillion worth of debt, according to Bloomberg.

Putting the FHLB into conservorship would add a massive amount to the US government’s bailout burden. Of crucial importance will be, as Bloomberg notes:

… whether declines in the market value of the mortgage bonds, totaling $13.5 billion on Sept. 30, will be deemed “other-than- temporary impairments,” or OTTI, and how much of the losses their regulator will see as irreversible, the statement said.

In other words accounting impairments on the organisation’s MBS portfolio (something like $62.7bn based on third-quarter 2008 market prices according to Moody’s, down from $76.2bn), should they be deemed non-temporary, could result in further erosion of the banks’ capital bases. From Reuters:

“If these unrealized losses are deemed OTTI,” he said, “the FHLBanks’ capital levels would be significantly affected — an issue that is likely to become far more evident during the next two quarters.”

“The impact could have important ramifications — both in terms of more limited, more expensive access to the capital markets and of heightened regulatory supervision due to the breach of regulatory capital minimums,” he said.

But the FHLBanks’ lending activities are so important that the regulators would probably not reduce individual banks’ lending activities even if they were to incur substantial OTTI charges, he said.

Saved by lower standards once again. Hurrah!

(HT Rolfe Winkler at Option ARMageddon).

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