Bailout Nation: FHLBs Next?

Uh oh… it looks like these clowns are going to have to get bailed out next.

No biggie though… “the FHLB system has $1.25 trillion of debt, making it the largest U.S. borrower after the federal government.”

My ninja senses tell me that 2009 is going to be one wild year.

Seattle FHLB Likely Short of Capital on Mortgage Debt (Update1): “The Federal Home Loan Bank of Seattle joined its San Francisco counterpart in suspending dividends and “excess” stock repurchases, after the declining value of mortgage bonds likely led to a regulatory capital shortfall.

The shortfall is being 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 bank 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 also 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.

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.”