Wednesday, October 31, 2007
$163bn in fhlb loans in two months
Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.
To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs' Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.
the creation of yet another layer of credit which, along with the migration of siv assets back onto bank balance sheets, help account for runaway broad money supply growth in the last two months. and the fhlb's have now heavily levered themselves against credits that are highly questionable, making themselves a surrogate lender of last resort.
The home loan banks ``were the only game in town for a lot of borrowers,'' said Jim Vogel, head of agency debt research at FTN Financial a securities firm in Memphis, Tennessee. They are ``like an old watch your grandfather left you years ago, and you pull it out of the drawer and find it's the only timepiece you have.''
but they aren't as antiquated as it would seem by that quote. as a group, the twelve branch banks carry more mortgage debt on their balance sheets than fannie mae and freddie mac combined. and they have just as much trouble accounting for their assets properly.
kevin depew asks:
If the FHLB is now the lender of last resort for many of these financial institutions, some of them extraordinarily weak, what if in the course of loaning money to weak members, who in turn used that money to shore up weak positions, we begin to see the strong members of the system back out?
If confidence in the FLHB system weakens, prompting investors to get rid of FHLB debt, could this cause the collapse of one of the banks?