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…)
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…)
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:
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.
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.
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.
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.
Related Sense on Cents Commentary
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…)
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!!