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HomeFreddie Mac, Fannie Mae Deja Vu?
Posted by Larry Doyle on May 28th, 2009 4:21 PM |
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…)
FHLBs: Red Sea, Dead Sea or Both?
Posted by Larry Doyle on May 25th, 2009 8:46 AM |
On April 2nd, in a post Putting Perfume on a Pig, I compared Freddie Mac, Fannie Mae, and the Federal Home Loan Bank system to the Red Sea. Why? For the very simple reason that for the foreseeable future, these entities will accrue losses. How? Unlike commercial banks, Freddie, Fannie, and their 12 FHLBs have very little earnings power in this environment while faced with a steady stream of losses on their mortgage holdings given ongoing defaults and foreclosures.
In retrospect, would it have been more appropriate to compare the FHLB system to the Dead Sea than the Red Sea? I think it may. As the Wall Street Journal highlights, Directors Are Faulted at Home Loan Banks:
Financial troubles at some of the Federal Home Loan Banks are raising questions about how well directors of these institutions are supervising their executives.
A plunge in the value of mortgage securities bought by several of the regional home-loan banks has forced them to halt dividends and curtail funding for local housing projects. An annual report issued by the banks’ regulator this past week says some of them “paid insufficient attention” to credit risks and haven’t invested enough in information technology.
Unlike giant banks or government-backed mortgage companies Fannie Mae and Freddie Mac, the 12 regional home-loan banks draw little public scrutiny. (LD’s emphasis) Created by Congress in 1932 to support the housing market, they are cooperatives owned by more than 8,000 banks, thrifts, credit unions and insurers.
Why do these home loan banks draw such little public scrutiny? They are the wholesale entity (providing funds) to their retail network (banks, thrifts, credit unions, insurers) which deals with the public. With no interaction with the public, the media and market analysts have accorded them little coverage. Thus, I make the assertion that these banks truly are a combination of both the Red Sea (ongoing losses) and Dead Sea (no coverage). (more…)
