Tuesday, January 13, 2009

Seattle FHLB Likely Short of Capital on Mortgage Debt

(Bloomberg) 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.
Citigroup Inc., JPMorgan Chase & Co., and the other U.S. financial companies that own and borrow from the government-chartered system may have higher financing costs as a result, a Keefe, Bruyette & Woods analyst said yesterday.

“Systemic weakness in the FHLBs, which may require federal action, could have a number of implications for U.S. banks and thrifts, including: higher costs of FHLB borrowings, reduced value of FHLB stock, and increased demand for alternative sources of liquidity,”
Frederick Cannon, an analyst at Keefe, Bruyette in San Francisco, wrote in the report.

The San Francisco FHLB reported Jan. 8 that it was suspending dividend and repurchases of shares in excess of what is required for members’ current loans because of losses on so- called private-label, or non-agency, mortgage bonds. It didn’t say whether it expects to still be above capital requirements.

Looking for Relief
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.

Seattle FHLB Chief Executive Officer
Richard Riccobono wrote in a letter yesterday to members that the calculation of its “risk-based” capital needs, the measure by which it is failing regulatory tests, “significantly overstates our market risk.”

It is required to maintain extra reserves equal to 130 percent of the amount by which the price of its assets falls below 85 percent of book value, he wrote. Riccobono said the bank has “communicated our concerns regarding the current risk-based capital methodology to our regulator and have requested that they review the regulation, but we have not yet received a final determination as to whether or not there will be any relief.”

Stefanie Mullin, a spokeswoman for the Federal Housing Finance Agency, the FHLBs’ regulator, declined to immediately comment.

Member Borrowings
The Seattle FHLB calculates its risk-based capital requirements monthly, so the bank may see the shortfall reversed and remains “in compliance with all of our other regulatory capital requirements, specifically our capital-to-assets ratio and our leverage capital ratio,” Riccobono wrote.

The regional FHLBs lend the money they raise as a group in the so-called agency debt market to more than 8,000 thrifts, credit unions, insurers and commercial banks at below-market rates, mainly to finance their mortgage holdings.

Washington Mutual Inc., Merrill Lynch & Co. and Bank of
America Corp. were the largest users of the Seattle FHLB’s secured loans as of Sept. 30, borrowing 59 percent of its $46.3 billion, according to a November securities filing.

Seattle-based Washington Mutual filed for bankruptcy Sept. 26, the day after its banking units were seized by regulators and sold to JPMorgan Chase & Co. for $1.9 billion. New York-based Merrill was bought by Bank of America Corp. on Jan. 1 for about $33 billion after struggling with mortgage-related writedowns.

Citigroup, JPMorgan and Wachovia Corp., which
Wells Fargo & Co. acquired this month, were the largest borrowers from the Federal Home Loan Bank of San Francisco on Sept. 30, with $178.5 billion of so-called advances, according to Cannon’s report.

From Roubini's testimony to Congress on February 26th, 2008:

[T]he widespread use of the FHLB system to provide liquidity – but more clearly
bail out insolvent mortgage lenders – has been outright reckless. ... A system
that usually provides a lending stock of about $150 billion has forked out loans
amounting to over $750 billion in the last year with very little oversight of
such staggering lending. The risk that this stealth bailout of many insolvent
mortgage lenders will end up costing massive amounts of public money is now
rising.

1 comment:

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