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Archive for the ‘Federal Home Loan Banks’ Category

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

Posted by Larry Doyle on October 26th, 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: (more…)

FHLB San Francisco Earthquake

Posted by Larry Doyle on June 3rd, 2010 11:52 AM |

I first introduced readers of Sense on Cents to issues embedded within the Federal Home Loan Bank system in the spring of 2009. In an article entitled FHLBs: Red Sea, Dead Sea or Both?, I highlighted:

Charles Bowsher, the former chair of FHLB’s Office of Finance sent a warning shot loud and clear about the “hidden and embedded” losses in this system when he resigned his position as chair of the FHLB Office of Finance in late March (2009). As Bloomberg reported on April 2nd:

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.

Well, the shot Bowsher sent a year ago reverberated today in the form an earthquake as reported by the American Banker, Questioning Marks on Mortgage Bonds at San Francisco FHLB:>>>> (more…)

FHLB-Seattle Sues Wall Street

Posted by Larry Doyle on January 27th, 2010 9:54 AM |

When people lose a lot of money, it’s no surprise that they find a lot of lawyers and a lot of reasons to start bringing lawsuits.

Talking about losses, I first introduced readers to the expected red ink within the Federal Home Loan Bank (FHLB) system last May. I wrote “FHLBs: Red Sea, Dead Sea or Both?” and “Freddie Mac, Fannie Mae Deja Vu?” to highlight the embedded losses within the FHLB system. The losses are centered in the massive mortgage portfolios within the system. The toxic waste within a lot of these mortgages is now being realized in terms of actual losses as an ever increasing percentage of the mortgages default. What’s the result? Let’s go to court.

Thank you to a loyal Sense on Cents supporter for highlighting a developing lawsuit. The FHLB-Seattle is effectively suing all of Wall Street. This suit and its underlying roots deserve significant broad based coverage. Why? (more…)

Sleepless in Seattle . . . FHLB-Seattle, That Is

Posted by Larry Doyle on November 10th, 2009 4:28 PM |

Having broached expectant difficulties in the Federal Home Loan Bank system last spring, I try to keep a close eye out for news of note on this largely unknown – but critically important – system of banks. To a large extent, the FHLBs have been flying under the radar despite some serious problems within their investment portfolios and loan books.

High five to KD for pointing out that the folks at FHLB-Seattle probably are not getting much sleep these days. Why is that? Insufficient capital will do it to you every time. As the American Banker offers, FHLB Seattle Still “Undercapitalized,” Regulator Says:

The Federal Housing Finance Agency said late Friday that the Federal Home Loan Bank of Seattle remains “undercapitalized” and will not be allowed to redeem or repurchase stock or pay dividends.

At the end of 2004, as the bank struggled with the size of its mortgage purchase program, it said members who wish to redeem their stock must wait five years before receiving their money.

But with that time period almost up, the Finance Agency said it would not allow the bank to begin redeeming stock, fearing it could lower its capital base. (more…)

FHLB-Chicago Skating on Very Thin Ice

Posted by Larry Doyle on August 5th, 2009 4:21 PM |

The Federal Home Loan Bank (FHLB) system represents significant risks within our financial system. The fact that you do not hear about this system does not mean the risks are shallow or insignificant. You do not hear about the FHLB system simply because the general media pays no attention to it. They should.

Thanks to a close friend for sharing a recent FHLB-Chicago Presentation. This overview provides the following:

1. market update
2. financial results
3. developments in products, credit, and collateral
4. future outlook

Based on my experience, the FHLB-Chicago was always one of the more conservatively managed banks within the FHLB system. That said, after reviewing their financials it is very apparent that this bank is skating on very thin ice and if not for the relaxation of the mark-to-market by the FASB would be well below regulatory capital standards.

For those intrigued by the inner workings of a FHLB, this review provides riveting details. If you are looking for the Cliff Notes, allow me to highlight:

Pages 27-28
The Net Income Statement for ytd 2009 and comparable period in 2008 displays the enormous benefit of the relaxation of the mark-to-market accounting standard as the bank swings from a $152 million loss in 2008 to a $64million gain for ytd 2009.

Pages 35-36
The regulatory capital ratios for FHLB-Chicago highlight that this entity has approximately a mere $200 million in excess capital above the minimum requirement. For an entity this size, $200 million is razor thin.

Page 39
Credit
impairment of this bank’s assets is truly mind boggling. As of year end 2007, the FHLB-Chicago viewed 100% of their assets as being AAA. Fast forward a mere 18 months, now 35% of these assets are rated CCC or worse. Please review the graph on this page for a hint as to the destructive nature of these ratings downgrades on this bank. FHLB-Chicago is representative of many financial entities in our banking system today. No surprise why so many are failing and will continue to fail. This graph is very powerful.  What do you think the bid is for that CCC bucket of assets right now? Zero or very close.

Page 40
The FHLB-Chicago highlights that they have taken writedowns of $263 million on their assets due to credit impairments while they still view potential writedowns of $1.213 billion on these assets due to market conditions.

Given that the FHLB-Chicago admittedly has a mere $200 million in excess capital to satisfy the minimum regulatory capital ratio, we can see that without the relaxation of the mark-to-market they would be woefully capital deficient.

Is the housing market going to improve markedly so that their assets will dramatically increase in value, especially that 35% in the CCC bucket? I would not bet on it.

. . . and the FHLB-Chicago is one of the better managed.

LD

Related Sense on Cents Commentary

Freddie Mac, Fannie Mae Deja Vu?; May 28, 2009

Uncle Sam’s Dirty Little Secret Is Revealed

Posted by Larry Doyle on July 23rd, 2009 11:15 AM |

Uncle Sam may think he can keep losses of tens of billions of dollars somewhat secretive, but when those losses cross into the hundreds of billions the dirt is much harder to keep under the rug.

What is the nature and size of this dirt? The losses assocated with those dastardly large twins, Fannie and Freddie. I lifted the rug on this dirt on June 18th in writing, Uncle Sam’s Dirty Little Secret.

Fannie and Freddie hold 50% of the mortgages in our country. These entities are most likely sitting on hundreds of billions in embedded losses currently with limited prospects to generate real revenue. They have no viable business model at this point in time.

CNN reports today, Fannie and Freddie: The Most Expensive Bailout

When Congress was debating the bailout of Fannie and Freddie last July, the official estimate from the Congressional Budget Office was that a bailout would most likely cost taxpayers $25 billion, with only a 5% chance of the price tag reaching $100 billion between them.

In addition, both Fannie and Freddie are likely to need billions of dollars more after they report second quarter results in the coming weeks. Experts believe the cost will only continue to rise in the next year.

“We’re assuming they each will cross the $100 billion mark fairly soon. They could be hitting the $200 billion barrier by the end of next year,” said Bose George, mortgage analyst at Keefe, Bruyette & Woods, an investment bank specializing in financial services firms.

The fact remains that these two wards of the state are no longer for profit entities but rather vehicles for promoting Obama’s housing plans and redistribution of wealth.

The losses within Fannie and Freddie will accrue as long as housing delinquencies and defaults increase. No credible analyst can truly predict when those statistics may peak. They can guess but given the runup in home prices along with the growth in housing, that is all they can do.

In fact, the argument can be made that the very policies being utilized to forestall delinquencies and defaults will ultimately exacerbate and extend the pressure on the housing market, and in turn, Fannie’s and Freddie’s losses.

Will the American taxpayer ever see a return on the funds being pumped into Fannie and Freddie? Don’t hold your breath. 

CNN continues,

Neither firm has given an estimate as to how high losses will reach. But the original limit of $100 billion in losses set in place when the government put Fannie and Freddie into conservatorship, essentially a form of bankruptcy, last September was quickly raised early this year to $200 billion each because of concerns about looming losses.

In return for pumping taxpayer dollars into the two firms, Treasury received preferred stock, which is designed to give the government a healthy 10% to 12% dividend. But few expect that Fannie or Freddie will be able to pay that dividend, let alone return the money handed to the firms to cover their losses..

Even James Lockhart, director of the Federal Housing Finance Agency, the government body that has overseen the two firms since they were placed into conservatorship, said it will be a challenge for Fannie and Freddie to make their scheduled payments.

Let’s be honest, Fannie and Freddie have become financial intermediaries used to promote a form of socialized housing.

With Uncle Sam’s dirty little secret now revealed, break out the industrial strength vacuums!

LD

Related Commentary

Freddie Mac, Fannie Mae Deja Vu? ; May 28, 2009
If you think Fannie and Freddie are alone amidst this dirt, they have sizable company in the form of the Federal Home Loan Bank system.

Financial Cooking

Posted by Larry Doyle on July 5th, 2009 8:46 AM |

When business operations make money, it is due to the brains and intellect of management, correct? When business operations lose money, it is some sort of nefarious measure at work in the marketplace which can be ‘corrected’ by changing the rules, correct? The implementation of the relaxation of the FASB’s (Federal Accounting Standard Board’s) mark-to-market utilizes that thought process. Make no mistake, it is flawed and simply allows financial institutions to ‘manage earnings,’ otherwise known as “cook the books.”

We receive a whiff of this recipe in a report by the Wall Street Journal, Home Loan Banks See Net Income Decline 51%. I have maintained that the basic business model of the FHLBs is flawed and we see evidence of this in the fact that outstanding advances (loans) by the FHLBs to their member banks actually decreased in the 1st quarter of this year:

Total advances outstanding from the banks declined to $817.41 billion as of March 31 from $928.64 billion three months earlier. After surging in 2007 and early 2008, demand for those advances has slackened, partly because of the recession and partly because the federal government has offered alternative funding programs for commercial banks.

Without even maintaining the level of advances, the FHLB system is coming under increasing pressure to generate earnings in the face of increasing delinquencies, defaults, and foreclosures on all of their holdings–advances, mortgage originations, and mortgage-backed securities purchased from Wall Street. (more…)

Uncle Sam’s Dirty Little Secret

Posted by Larry Doyle on June 18th, 2009 4:36 PM |

If a tree falls in the forest and nobody is there to hear it, does it make any noise?

If an agency is sitting on billions in losses but nobody asks about it, can we forget about it?

If an entire group of banks is sitting on hundreds of billions more in losses, and the media is not even aware of this banking system, can we pretend they don’t exist?

Oh, if only we could, perhaps our economic life would be so much simpler.

While Uncle Sam and the media can choose to overlook these institutions, the losses are real and will serve as a drag on our economy and nation for the foreseeable future. Yet, they receive very little attention. Fortunately, Bloomberg shed a hint of light on part of this problem today in writing, Fannie Mae, Freddie Mac in Limbo as Geithner Seeks More Time:

Fannie Mae and Freddie Mac will remain in limbo as the U.S. Treasury secretary said the government doesn’t have time now to deal with the future of the two mortgage-finance companies it seized in September.

“We did not believe that we could at this time — in this time frame — lay out a sensible set of reforms to guide, to determine what their future role should be,” Treasury Secretary Timothy Geithner told the Senate Banking Committee in Washington today. “We’re going to begin a process of looking at broader options for what their future should be.”

Doesn’t have time or doesn’t want to admit that these agencies represent an ongoing and enormous drag on our economy? How so? Fannie and Freddie hold 50% of the mortgages in our country. These entities are most likely sitting on hundreds of billions in embedded losses currently with limited prospects to generate real revenue. They have no viable business model at this point in time. As a result, rather than entering into an unpleasant and economically harmful dialogue, Geithner chooses to sweep this under the rug. How can Tim do this? Because Uncle Sam has allocated, if not necessarily set aside, funds for these agencies to offset future losses.  As Bloomberg highlights:

The remainder of Fannie Mae and Freddie Mac’s  $400 billion U.S. Treasury lifeline should still be “sufficient” until the government decides how to restructure the companies, Federal Housing Finance Agency Director James Lockhart said in June 3 testimony to a House subcommittee. Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac have already requested $84.9 billion in taxpayer aid through the Treasury’s program to buy the companies’ preferred stock to keep them solvent.

Over and above swimming in a sea of losses, both Freddie and Fannie are effectively rudderless. Fannie Mae’s acting CEO, Herb Allison, was recently appointed to oversee management of TARP funds at Treasury. Freddie Mac’s acting CEO, John Koskinen, had resigned and only returned when beseeched. While Koskinen has committed to retaining the role of chairman of Freddie, he can’t get out of his daily Freddie Mac responsibilities quickly enough as the WSJ reports, Freddie’s Accidental CEO Tries to Shed Job.

The dirtier little secret hidden by Uncle Sam is embedded within the Federal Home Loan Bank system. Why? After Uncle Sam, the FHLB system is the second largest creditor in our country with approximately $1.2 trillion in outstanding debt. While Freddie Mac and Fannie Mae’s portfolios are chock full of agency mortgage-backed securities (MBS backed by conforming size loans), the portfolios within the FHLB system (12 regional banks) are stuffed with Jumbo mortgages, Alt-A, pay-option ARMS, and sub-prime. In short, lots of toxic assets and lots of embedded losses hidden by the artful deceit of the relaxed mark-to-market accounting standard.

Where are we going with these future wards of the state?  I project that in 2010, we will see these 14 entities (Freddie and Fannie and 12 regional FHLBs) combined into one large government owned housing finance entity.

Shhhhh . . . don’t tell anybody!!

LD

Wall Street – Washington: “Pay to Play”

Posted by Larry Doyle on June 3rd, 2009 7:46 AM |

In my opinion, the relaxation of the FASB’s (Federal Accouting Standards Board) mark-to-market rule was nothing more than a vehicle to allow banks to “cook their books.”  The “cooking” of the books put the burner on a low simmer in order to allow the banks sufficient time to generate earnings. Those new earnings can and will be used to offset the currently embedded losses on the toxic assets still residing in the banking industry.  

The FASB did not relax their accounting rule without enormous pressure applied by both the Wall Street and Washington chefs.  The Wall Street Journal reports, Congress Helped Banks Defang Key Rule:

Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took aim at an accounting rule that forced them to report billions of dollars of losses on those assets.

Marshalling a multimillion-dollar lobbying campaign, these firms persuaded key members of Congress to pressure the accounting industry to change the rule in April. The payoff is likely to be fatter bottom lines in the second quarter.   

I have numerous questions and comments on this topic, including:

1. If this accounting rule was so insidious, why was “mark-to- market” accounting ever enacted in the first place?  

Sense on Cents: As with any accounting rule, the “mark-to-market” was implemented to create transparency.

2. Are the toxic assets still on the bank books?

Sense on Cents: Most definitely. They are merely being masked via this relaxation.

3. Banks maintain the toxic assets don’t actively trade and, when they do, they trade at levels not reflective of their true values.

Sense on Cents:  These assets have traded everyday and at levels assuming a heightened level of future defaults on the underlying mortgages. If the banks believe the market levels are not reflective of true value, then why haven’t they and global investors raised the funds to purchase these massively undervalued securities? Investors trust the market assumption of future defaults.  

The WSJ reports:

Earlier this year, financial-services organizations put their lobbyists on the case. Thirty-one financial firms and trade groups formed a coalition and spent $27.6 million in the first quarter lobbying Washington about the rule and other issues, according to a Wall Street Journal analysis of public filings. They also directed campaign contributions totaling $286,000 to legislators on a key committee, many of whom pushed for the rule change, the filings indicate. 

4. Wall Street paid approximately $28 million in contributions and lobbying to effect this accounting change. The banks made these payments while in receipt of billions of dollars of TARP funds (taxpayer/ government assistance). Did Wall Street effectively utilize taxpayer funds in order to “pay” Washington so the banks could continue “to play” their game?

Sense on Cents: In my opinion, most definitely!!

5. How long had the “mark-to-market” been in effect prior to its relaxation?

Sense on Cents: Decades. It worked just fine.

6. Why didn’t banks lobby in the 2000-2006 era that assets were being overvalued via this accounting standard?

Sense on Cents: Bank executives were being “paid” from those inflated valuations. 

7. Given that the banks now utilize internal pricing models to value the toxic securities, are those models and their embedded assumptions made public so investors can have some degree of transparency?

Sense on Cents: NO!! Why would the banks want the “cooking” exposed?

In summary, this version of “pay to play” will be seen as a watershed event in the Brave New World of the Uncle Sam economy. Why will future economic growth underperform? The banking industry will be forced to continue to set aside reserves against the embedded toxic assets. In so doing, the banks will have less credit to extend to consumers and business.

LD

For more on this topic, I submit:

Putting Perfume on a Pig
April 2nd; post written the day FASB relaxed the mark-to-market standard

Freddie Mac, Fannie Mae Deja Vu?
May 28th; post highlighting the massive embedded losses in the Federal Home Loan Bank system. These losses are masked by the relaxation of the mark-to-market.

Legalized Bribery
February 16th; post highlighting Chuck Hagel and Leon Panetta implicating Washington politicians’ endless pursuit of money. 

How Wall Street Bought Washington
March 9: post highlighting the massive money spent by Wall Street to curry influence in Washington.

Cox’s Last Stand

Posted by Larry Doyle on June 2nd, 2009 3:02 PM |

Chris Cox’s tenure as chair of the SEC was not highly regarded. From the debacle with the Bernie Madoff situation, to the failure of Lehman Bros., to the fraud encompassing Auction Rate Securities, the SEC under Cox was reduced to a kangaroo court. Knowing full well that he and his regime at the SEC would largely be held in contempt, it appears that Cox attempted to salvage some degree of respect as he prepared to depart. How so? Bloomberg reports Cox Questioned Fannie, Freddie Oversight While At SEC:

Christopher Cox, in one of his last acts as Securities and Exchange Commission chairman, took Fannie Mae and Freddie Mac’s regulator to task in a letter questioning whether the agency was upholding its legal duty to “preserve and conserve” the mortgage companies’ assets.

Cox asked in the Jan. 16 letter to Federal Housing Finance Agency Director James Lockhart whether the government-sponsored enterprises were being pressed too hard to bolster U.S. housing markets at the expense of profits. As a member of an oversight board advising Lockhart, Cox urged Lockhart to develop an “exit strategy” from government conservatorship that would restore the companies’ finances.

Cox’s questioning of the motivation and practices of the FHFA eerily reminds us of the pressures applied to Freddie Mac CFO David Kellerman prior to his taking his life. Clearly, Cox and Kellerman were uncomfortable in the approach and practices promoted by Uncle Sam. As The New York Times reported on April 22, 2009, Reported Suicide is Latest Shock at Freddie Mac:

Mr. Kellermann was also working in a poisonous political atmosphere. In addition to taking criticism over the bonuses, he was recently involved in tense conversations with the company’s federal regulator over its routine financial disclosures, according to people close to those discussions who also spoke on condition of anonymity. Freddie Mac executives wanted to emphasize to investors that they believed the company was being run to benefit the government, rather than shareholders. The company’s regulator, the Federal Housing Finance Authority, had pushed to play down that language. Freddie Mac reported to the Securities and Exchange Commission that changes it had made in practices to help the government “have increased our expenses or caused us to forgo revenue opportunities.”

In a very similar fashion, Bloomberg today reports:

The letter from Cox, which hasn’t been made public, underscores the tension between Fannie Mae and Freddie Mac’s responsibilities to investors and government demands that they help end the worst housing crisis since the Great Depression. The issues facing the companies, saddled with seven consecutive quarters of losses totaling $150 billion, will be examined by a House panel tomorrow.

Certainly both Cox and Kellerman felt seriously troubled and conflicted between their roles and responsibilities and the goals of the government programs. The government programs have amounted to a massive redistribution of wealth to select American homeowners from investors, with the ultimate burden being assumed by American taxpayers.

Cox is trying to defend what is left of his reputation by shedding light on the magnitude of the “red sea” of embedded losses at Freddie and Fannie. Over and above that, the systemic risk posed by Freddie and Fannie has very real risk for other quasi-government agencies. Bloomberg addresses all of the possible consequences:

Failure to make Fannie Mae and Freddie Mac financially sound would impose expanded burdens on the Treasury and private debt markets because their $1.7 trillion in unsecured debt and $4 trillion in mortgage bonds are so widely held, he said. The government would bear responsibility even though the companies’ liabilities aren’t technically backed by its full faith and credit, he wrote.

The U.S. may be forced to assume the companies’ liabilities, increasing the $11.3 trillion in outstanding U.S. debt by about 50 percent and hampering the Treasury’s ability to borrow, Cox said.

If the government chose not to back Fannie Mae and Freddie Mac’s debt and they defaulted, Cox said there may be “significant impact on both the Treasury market as well as the agency market, including the Federal Home Loan Banks, the Farm Credit System and the Tennessee Valley Authority.

While Chris Cox has now been relegated to a punching bag in the pursuit of regulatory reform, he should be commended for drawing attention to the ugly underside of our financial system embodied by Freddie, Fannie, and their cousins FHLB, FCS, and TVA.

LD






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