Seattle Home Loan Bank short of capital

Today, the Seattle Federal Home Loan Bank (FHLB) has admitted that it is on the verge of collapse and may need to avail itself of conservatorship, much as Fannie Mae and Freddie Mac did previously. One should see this announcement as a confirmation that the U.S. financial system is much weaker than generally believed.

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Today, the Seattle Federal Home Loan Bank (FHLB) has admitted that it is on the verge of collapse and may need to avail itself of conservatorship, much as Fannie Mae and Freddie Mac did previously. One should see this announcement as a confirmation that the U.S. financial system is much weaker than generally believed.

Last week, we heard from Moody’s that 4 of the 12 FHLBs were likely bankrupt. The FHLB entry on Wikipedia even begins with this fact in explaining who the FHLBs are:

The Federal Home Loan Banks provide stable, on-demand, low-cost funding to American financial institutions for home mortgage loans, small business, rural, agricultural, and economic development lending. With their members, the FHLBank System represents the largest collective source of home mortgage and community credit in the United States. The banks do not provide loans directly to individuals, only to other banks.

On January 8, 2009, Moody’s said that only 4 of the 12 FHLBs may be able to maintain minimum required capital levels and the U.S. government may need to put some of them into conservatorship.

Now, Bloomberg is reporting that the Seattle FHLB has suspended its dividend because it is going to fail.

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The Federal Home Loan Bank of Seattle joined its San Francisco counterpart in suspending dividends and “excess” stock repurchases, after devalued mortgage bonds dropped its capital below a regulatory requirement.

The likely shortfall on Dec. 31 was caused by “unrealized market value losses” on home-loan securities without government backing, the Seattle bank cooperative said in a filing with the U.S. Securities and Exchange Commission today.

The Federal Home Loan Banks, or FHLBs, face potentially “substantial” losses, and in a worst-case scenario only four of the 12 would remain above capital minimums, Moody’s Investors Service said last week.

How big are the FHLBs? Huge.  Also note the part I have bolded from the Bloomberg article.

The FHLB system has $1.25 trillion of debt, making it the largest U.S. borrower after the federal government. Moody’s said it’s unlikely to cut the system’s Aaa grades because of their government support, and that the banks are unlikely to suffer actual losses as large as those reported under accounting rules.

The last statement is a matter of opinion and not fact. The fact is the FHLBs have been undermined by the need to help out the weak U.S. banking system. For example, the Seattle FHLB is the home loan bank to Washington Mutual which failed late last year. It also is taking on enormous amounts of credit from Bank of America, an active West Coast bank with many dodgy assets on its books from the Merrill and Countrywide acquisitions.

As financial shares have come under pressure in anticipation of a very weak earning s season, this is only going to add fuel to the fire. Trouble in AMmerica’s financial sector is far from over.

Sources
Seattle FHLB Likely Short of Capital on Mortgage Debt – Bloomberg.com
Federal Home Loan Banks – Wikipedia

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