Sense on Cents

Can our economy absorb another financial hit of the magnitude of Freddie Mac and Fannie Mae?

In the process of digging for some data on Uncle Sam’s TARP commitments, I came across a compelling story at Subsidyscope, a Financial Primer (right sidebar) link here at Sense on Cents. The lead story at Subsidyscope, dated May 26, 2009: Concerns Grow Over Federal Home Loan Bank Investments. They write: 

The Federal Home Loan Banks, or FHLBs, may be the biggest financial players you’ve never heard of. Collectively, they hold $1.3 trillion in assets and are the largest U.S. borrower after the federal government.

For readers here at Sense on Cents, I have raised warnings about the FHLB system both on April 3rd (Putting Perfume on a Pig!!) and just this past Monday, May 25th (FHLBs: Red Sea, Dead Sea, or Both?). In my opinion, there is little doubt that the FHLB system was the greatest beneficiary of the FASB’s relaxation of the mark-to-market. Subsidyscope says as much:

A Subsidyscope review of the FHLBs’ financial statements has found that several of the banks are carrying substantial “unrealized losses” on their investments in mortgage-backed securities. Because the banks believe these losses are temporary, they don’t have to be recognized on the banks’ accounting statements.

What’s potentially worrisome is the sheer size of the losses. For the Federal Home Loan Bank of Seattle, they are substantially larger than the capital the bank holds to protect itself against such declines. If its mortgage-backed securities don’t regain their value, the bank will have to write them down, which could wipe out its capital buffer and raise risks for taxpayers. 

Remind you of Freddie Mac and Fannie Mae? I thought so. Let’s continue to dig even deeper. Subsidyscope asserts: (more…)