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Tuesday, January 13, 2009


FHLBs in distress

via credit writedowns -- seattle's federal home loan bank has suspended its dividend and is on the brink of collapse. this is the logical consequence of the rapacious use of the FHLB system to bail out insolvent mortgage lenders earlier in this crisis.

Last week, we heard from Moody’s that 4 of the 12 FHLBs were likely bankrupt. Now, Bloomberg is reporting that the Seattle FHLB has suspended its dividend because it is going to fail.

The Federal Home Loan Bank of Seattle joined its San Francisco counterpart in suspending dividends and “excess” stock repurchases, after devalued mortgage bonds dropped its capital below a regulatory requirement.

The likely shortfall on Dec. 31 was caused by “unrealized market value losses” on home-loan securities without government backing, the Seattle bank cooperative said in a filing with the U.S. Securities and Exchange Commission today.

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

The fact is the FHLBs have been undermined by the need to help out the weak U.S. banking system. For example, the Seattle FHLB is the home loan bank to Washington Mutual which failed late last year. It also is taking on enormous amounts of credit from Bank of America, an active West Coast bank with many dodgy assets on its books from the Merrill and Countrywide acquisitions.

As financial shares have come under pressure in anticipation of a very weak earning s season, this is only going to add fuel to the fire. Trouble in America’s financial sector is far from over.

moody's did not downgrade any FHLB debt as they view implicit support from the government along the lines of fannie mae and freddie mac as inevitable. and it is. but the cost to the taxpayer is ramping up in every direction as government attempts to mitigate the fallout of what is becoming the greatest debt collapse of all time.

UPDATE: more from ft here and here.

A bailout would be a big deal — as we noted last week, the FHLBs have something like $1.25 trillion worth of debt between them. According to Bloomberg they’re the US’s biggest collective borrowers — bigger even than Fannie or Freddie. Their contribution to liquidity in recent months was second only to the Federal Reserve. So neither the US government, nor the FHLBs themselves, likely want an outright bailout or failure.

One other option would be altering the rules of the capital requirement — and this seems to be what the FHLBs are now aiming for.

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"the greatest debt collapse of all time": quite - and still people prattle about things getting back to normal. A better thing to prattle about would be "Will it be possible to salvage anything?"

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yeh, dm, unfortunately as time goes on and it becomes apparent that the remnants of the bush admin botched the eary response as badly as did the hoover admin, what optimism rang forth from hammering into s&p 740 is quickly dissipating.

nor should i imply, i suppose, that -- had paulson seen fit to solve problems rather than provide parachutes to cronies in investment banking -- it would have solved the problem. the structural correction of global flow of funds imbalances now underway was inevitably going to be very painful all around.

let's hope, however, that someone understands that a global trade war, whatever its short-run ramifications, is now decidedly in our interest and will likely lessen the impact of a global depression on the united states and britain while concentrating its effects in japan, china and germany. it's not what i would have chosen, but china effectively fired the first salvo in july 2008 by halting RMB appreciation and moving to a hard dollar peg. chinese mercantilism managed through their peg must be broken, or we are going to experience something very like a social collapse as we bear the brunt of liquidating excess capacity.

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dm -- this is excellent related reading.

Comparing what might be in store to the US to the UK after the Napoleonic Wars is a polite way of saying that level of indebtedness is a non-starter (I've also noted other commentators suggest the US could run the sort of fiscal deficits we incurred during World War II)...

the size of the debts now crashing are boggling.

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