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Is The Clock Getting ‘Close to Midnight’ for FHLB-Seattle?

Posted by Larry Doyle on October 26, 2010 5:46 AM |

All financial accounting charades to the contrary, the reality of a decaying asset quality and insufficient capital position will cause any institution to quiver. With more banking institutions declaring bankruptcy each and every week, the clock has yet to strike twelve on any of our larger banking institutions. That said, the pressure is certainly mounting on a large west coast institution, that being the Federal Home Loan Bank of Seattle.

I first addressed issues within this specific institution 18 months ago when writing, Putting Perfume on a Pig. I highlighted at that time:

Who gets this? Charles Bowsher, who resigned just last week as chairman of the Federal Home Loan Banks Office of Finance. Bloomberg’s Jonathan Weil does yeoman work in profiling Mr. Bowsher and the joke that is FHLB accounting:

Bowsher, who was comptroller general of the U.S. from 1981 to 1996, had a simple reason for resigning last week as chairman of the Federal Home Loan Bank System’s Office of Finance. He didn’t want to put his name on the banks’ combined financial statements, because he was uncomfortable vouching for them. Bowsher, 77, had held the post since April 2007.

With so many top executives complaining they can’t figure out what their companies’ assets are worth, the real wonder is that more corporate directors haven’t quit rather than certify financial reports they don’t understand.

The job Bowsher left is a crucial one. The Office of Finance issues and services all the debt for the 12 regional Federal Home Loan Banks. That’s a lot of debt — $1.26 trillion as of Dec. 31, making the FHLBank System the largest U.S. borrower after the federal government. The government-chartered banks, which operate independently, in turn supply low-cost loans to their 8,100 member banks and finance companies. If any of the FHLBanks were to fail, taxpayers could be on the hook.

….do not forget about Mr. Bowsher and his principles. His principles are being run over in the name of “creative accounting.” To wit, Bloomberg’s Weil offers,

The year-end balance sheet at the FHLBank of Seattle, for example, showed $5.6 billion of non-government mortgage-backed securities that it says it will hold until maturity. Yet the estimated value of those securities was just $3.6 billion. The bank, which reported a $199.4 million net loss for 2008, said the declines were only temporary. They’ve been anything but fleeting, though. Most of those securities have been worth less than they cost for more than a year.

Let’s fast forward to today. While our banking regulators have helped facilitate ‘kicking the can down the road,’ ultimately the clock does keep working its way toward midnight. On this note, the American Banker just released Seattle FHLB Enters Into Consent Agreement with FHFA; CEO Riccobono Resigns:

The Federal Home Loan Bank of Seattle entered into a consent order with the Federal Housing Finance Agency late Monday that requires the bank to take certain steps to improve its capital position and its business and operations.

Simultaneously, the bank announced that Richard M. Riccobono, its president and chief executive, had resigned. The bank’s board appointed Steven R. Horton as acting president and CEO, effective immediately.

In a press release, the bank did not offer a reason for Riccobono’s departure, but praised him as a “strong advocate for the Federal Home Loan Bank System and the Seattle Bank cooperative during what has been a very challenging time for our economy and our industry.”

Horton has served as the bank’s senior vice president and chief operating officer since May 2009. Previously, he has served in several other leadership roles at the bank.

The Seattle Home Loan Bank has been under a regulatory cloud since at least November of last year, when the Finance Agency declared it “undercapitalized” and banned it from redeeming its stock.

Under the consent order, the Finance Agency continues to consider the Seattle bank undercapitalized, but will allow it to begin repurchasing member capital stock starting in the third quarter of next year if it reaches and maintains certain financial thresholds. The bank will be allowed to pay dividends once it additionally “remediates certain concerns regarding its oversight and management, asset improvement program, capital adequacy and retained earnings,” the bank said. The FHFA said it would allow it to redeem stock and pay dividends only if it considers the bank in safe and sound condition. Any stock repurchases and redemptions and dividend payments will be subject to Finance Agency approval.

“The Seattle Bank regards this agreement with the Finance Agency as a positive step toward achieving our goals of returning to repurchasing and redeeming capital stock and to paying dividend,” said William V. Humphreys, the bank’s chairman, in the press release. “We look forward to working with the Finance Agency in this regard, and we are eager to begin the work that will bring us to those goals.”

Positive step? Begin the work? Wow. I have heard of spin, but Mr. Humphreys is really working hard on that statement.

Regrettably, the simple fact is the FHLB system is effectively a proxy for the housing market in our country. Despite all efforts to the contrary, as long as the housing market remains under duress, the FHLB system as a whole and a few institutions specifically, starting with Seattle, will be under the greatest pressure.

Not fun . . . but I believe that’s reality.

If you do not believe me, just ask Charles Bowsher.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • KD

    Baby steps???
    Thursday, October 28th, 2010, 1:33 pm (HOUSINGWIRE.COM)

    The Federal Home Loan Bank of Seattle reported third-quarter income of $9.7 million after losing $144.3 million a year earlier and another $93.8 million in the second quarter.

    FHLBs provide low-cost funding to financial institutions for mortgages and other loans. The Seattle FHLB said lower credit-related charges recorded on private-label mortgage-backed securities helped boost third-quarter earnings. Losses on those MBS holdings equaled $15.6 million for the quarter, down 88% from a year ago.

    The Federal Housing Finance Agency, its conservator, still deems the bank undercapitalized, although its capital did increase to $1.1 billion in the third quarter from $993 million at the end of 2009.

    The Seattle FHLB’s capital-to-assets ratio is 5.76%, and its regulatory leverage ratio came in higher at 8.48% fro 7.8% in the third quarter of 2009. FHFA requires the bank to maintain a 5% minimum, according to the bank’s spokesperson.






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