FHFA's DeMarco on the FHLB's - Ugly

Bruce Krasting's picture

The FHFA’s acting director Edward DeMarco has proven to be a refreshing
change from his predecessor James Lockhart. Mr. DeMarco has consistently
delivered the straight story ever since he assumed responsibility.
Yesterday was no exception.

He spoke at the Directors of the FHLB conference. He delivered this message:

FHFA is looking for the FHLBanks to prepare for
eventually moving derivatives activity to central clearing. This is a
prudential matter, and one we anticipate the FHLBanks doing with or
without legislation mandating it.

The time to be evaluating options in this
area is now.

I could imaging the groans of the Directors when this message was
delivered. What an elegant way of saying, “Mark you books down now
boys, we can’t extend and pretend any longer

It is impossible to determine what the size of the losses the FHLB’s are
looking at. Here is a look at the trillion-dollar balance sheet:

There may be some losses
in the retained mortgage portfolio but I am assuming this is small beer.
The $631b of “advances” is probably okay as well. These are short-term
loans to Community Banks. These are the banks that show up on the list
every Friday from the FDIC. If there is an issue here there is going to
be a big problem.

The real concern is in the $284b of “investments”. This is all private
label MBS. If the assets are marked to market the losses will be
significant. 30-50% is possible. That would put the loss in the range of
$80-$120 billion.

DeMarco's words on the “investments”:

“As we all know, when the credit characteristics of those
investments changed, leading to losses on the FHLBanks’ holdings of
private label mortgage-backed securities, the “normal” operations of
some of the Banks were disrupted.”

That is a polite way of saying that they took a bath. Fannie and Freddie
will cost us at least $400 billion. Add in another $100b for the FHLBs.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
McGriffen's picture

It's a system-wide concern, obviously, but isn't that also a case of several bad apples creating the most problems?  Seattle, Chicago were the two (2) main culprits (non-agency MBS owned, capital losses) I am wanting to recall.

Those advances...FHLB holds a secured/collateralized position and the system lends to insurance outfits as well (ie, not all community banks heading for the crapper).

FHLB generally won't lend vs below-investment grade securities or collateral.

whatsinaname's picture

so why do interest rates stay so low inspite of all this crummy news ? Are American savers doing a Japan on the bond markets in addition to the banker shenanighans of pouring Fed money into USTs ?

Rogerwilco's picture

Real interest rates are negative -- we are in a deflationary spiral, something Ben Bernanke vowed would never happen here. Rates may even go lower from here. They poured gasoline on the smoldering ashes last year, but the fire hasn't blazed up like they planned.

Panafrican Funktron Robot's picture

It was rather hilarious to see the currency component of the M1 and the MZM accelerating their movement opposite eachother.  Helicoptering currency into a bottomless pit doesn't change the nature of the pit.

Rogerwilco's picture

The third path is they put loudmouths, complainers, and protesters in jail, and the party continues as before.

Madcow's picture

Either asset prices correct to pre-1980 levels,

Or the USD collapses.

If someone could articulate a third path, i'd love to hear it -

sangell's picture

Seems that virtually every government agency these days is nothing but a place to stash losses. When does the Pentagon fess up that it too is holding billions in MBS?

Sudden Debt's picture

At this point you just stop counting

Problem Is's picture

Excellent Bruce.

Thanks for actual facts, figures and analysis... instead of sweaty bald headed Cramer the Clown bluster... Of course I guess you could have added:

"Investments ?? HaHaHa... $284,351"

Mitchman's picture

They just forgot the word "Illiquid" as a modifier.

Fish Gone Bad's picture

They could mark the kazillion $ investment to zero and the Fed will backstop them.  There are truly no (apparent) consequenses for bad behaviour.