One not-widely-reported element of this credit mess is the sub rosa role that various organizations have played in shoring up some of the weakened players.
Case in point: the Federal Home Loan banks, which during the acute phase of the credit crunch stood in for commercial paper buyers. From an earlier Bloomberg story:
The FHLBs are cooperatives created by President Herbert Hoover in 1932 to spur mortgage lending. The system’s 8,100 owners and customers range from New York-based Citigroup Inc., the largest U.S. bank, to the single-branch Custer Federal Savings & Loan in Broken Bow, Nebraska. Their government ties support top AAA ratings from Standard & Poor’s and Moody’s Investors Service.
They borrow in the bond market and lend the money to their members. Federal Home Loan Bank obligations, when combined with the $1.5 trillion debt and $4.7 trillion in bond guarantees of Washington-based Fannie Mae and Freddie Mac in McLean, Virginia, are 46 percent more than the $5.04 trillion of Treasury debt held by the public…..
Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.
To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs’ Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.
This was tantamount to borrowing at the Fed’s discount window, without the high profile and accompanying stigma. As the Wall Street Journal noted a few weeks later:
Before this summer’s credit squeeze hit, Countrywide raised money to fund its lending through short-term borrowings such as selling commercial paper. With that spigot largely closed, Countrywide also is leaning on the federal Home Loan Bank system for credit. The company’s borrowings from the Atlanta home loan bank soared to $51 billion on Sept. 30 from $28 billion nine months earlier.
Now, a bit late, Charles Schumer is taking interest. TheStreet.com (hat tip Housing Wire) reports:
In a letter dated Nov. 26 to Chairman Ronald Rosenfeld of the Federal Housing Finance Board, Schumer (D., New York) expressed “serious concern” that loans Countrywide Bank was pledging as collateral for those advances “may pose a risk to the safety and soundness of the FHLB system as a whole.”
FHLB Atlanta has made $51.4 billion in advances to Countrywide Bank as of Sept. 30, Schumer wrote, citing the most recent Securities and Exchange Commission filings. The amount represents 37% of the bank’s total outstanding advances and the $62.4 billion in loans Countrywide has put up as collateral represents 78% of its total mortgage holdings, Schumer said.
“I find these numbers alarming as reports continue to emerge about how Countrywide’s reckless and predatory lending practices were a leading contributor to today’s foreclosure crisis,” Schumer wrote in calling for the probe
Amazingly, Countrywide manages to soldier on despite all the organizations and individuals that have the bank in their crosshairs. But maybe I shouldn’t be surprised. It’s an organization that has always existed on the edge of the law.
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I have no joke – I just like saying “Custer Federal Savings & Loan in Broken Bow, Nebraska.”
Presumably their models proved that this many Indians could attack on the same day only once in 10,000 years.
Was the FHLB legally obligated to give the money to Countrywide once the latter showed up and asked for it? Or did they have discretion and could have refused?
Whatever the case, the FHLB should be trying to get its money back (and return the collateral) asap. Otherwise the taxpayer will be on the hook.
Was this only disclosed in Countrywide’s 10-Q filing? Why was it not disclosed immediately? This is another piece of evidence why Paulson is pushing MLEC. Paulson probably knew of this months ago.
I saw the October Bloomberg piece when it went up online. Remarkably little attention to it in MSM.
How odd it is Schumer taking up the cudgel.
i want to know who the bankers are on this deal? there should be a statute that prosecutes banks and thier bankers for advisory work that may on its face not be illegal but violates the spirit of the law. This is outrageous stuff but totally expected and this from somoen who has seen the corrupt inner workings from the inside
Maybe, just maybe, when Countrywide defaults on its FHLB obligations, the GSE will be allowed to fail instead of socializing the losses. The one problem is that most taxpayers are too ignorant to realize what is going on and will be made to feel like the gov’t is helping them….go figure!