NCPA - National Center for Policy Analysis

The Trouble with Federal Home Loan Banks

October 7, 2003

Like Fannie Mae and Freddie Mac, the 12 banks that comprise the Federal Home Loan Banks system are running with lots of leverage and an implicit guarantee by taxpayers. The banks -- nicknamed the Flubs -- also suffer from poor regulatory oversight, cozy corporate governance and insufficient financial disclosure, according to the Wall Street Journal.

Until recently, the Flubs were considered low-risk operations. But over the past several years, as their mission to provide loans to smaller lenders evanesced -- along with their profits -- they have become riskier, says the Journal.

  • In August, Standard & Poor's lowered its opinion on the bank's financial outlook, citing concerns with its investment portfolio.
  • A month later, the New York Flub announced it was suspending dividend payments after being hit by $183 million in losses from its investment in mobile-home loans; S&P responded by downgrading the New York bank's credit rating.
  • The amount of mobile-home paper held by the New York bank -- $1.7 billion -- also raised eyebrows since the rest of the Flub system holds only $45 million.
  • Last week, the New York Flub dropped another shoe, announcing an additional $6.6 million loss on $944 million of securities backed by home and business loans.

Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan are now arguing that the Flubs ought to have stronger supervision under the authority of the Treasury.

With the mortgage market showing signs of fatigue, Flub trouble could not only deck the U.S. economy, but spread to the international financial markets. It's not a moment too soon to bring all three of these high-risk housing giants under better control, says the Journal.

Source: Editorial, "Flubbing It," Wall Street Journal, October 7, 2003.

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