The Federal Home Loan Banks to the Rescue!
For those who have been speculating on how the government might bail out participants in the collapsing US subprime mortgage market, John Paul Koning writes that an unlikely savior has stepped forward: the Federal Home Loan Banks (FHLB), established in the midst of the Great Depression to provide a stable source of funding for member thrifts, otherwise known as savings & loan associations.
The FHLB system is hardly fair. Those with privileges — the member banks — get to borrow at rates below what the market would pay. Customers of these member banks are also privileged in that they can take out low-rate mortgages. This privilege is not free, though; it comes at the expense of all other taxpayers. Should the system experience some sort of setback, the implicit federal-government guarantee suggests that taxpayers will foot the bill — a select few bureaucrats, lenders, and house buyers benefiting at their expense.
The FHL Banks do not put themselves at risk by stepping in and lending to iffy members. They put FDIC at risk. And as we know from FSLIC's demise in the 1980s, any failure of FDIC would probably be funded by taxpayers to the tune of billions. FULL ARTICLE
Comments (9)
No wonder why lenders have given out money so easily. There are levels upon levels of government bureaucracy to take the risk off of lenders for defaults and dump that risk on tax payers.
I have always said that the lenders in this mortgage mess were behaving rationally by giving out as much "New" money as possible to whom ever would take it as the govenrment was there to bail them out.
Published: November 19, 2007 9:42 AM
Ah, yes: these institutions are ready to bail out members. Very bad!
Worse, though, is that the very existence of such organizations (including FDIC) promotes profligate management, and in fact forces such management on the industry.
Removing depositors' risk reduces depositors' concern in how a bank is managed. After all, if the bank fails, they won't lose, so why care? Since the banks have no public downside, they need to attract more and more "bad" business, just to stay in business. Clearly, until the crash, the money goes to the most-profligate managers! Then, after the crash, no depositors get hurt, so what's the worry? Regulators set it up, so they don't care; depositors are covered, so they want the most-aggressive institution possible. If a bank tried to act conservatively, it would be forced out of business, before the crash!
"Good" managers simply cannot compete, and thus good management is crowded out, in advance, by the very existence of these bail-out institutions. What the bail-out institutions actually do is largely irrelevant.
Published: November 19, 2007 10:23 AM
Well well what's so surprising about all this ?.
When governments create fiat money and nothing but hot air backing it, it is the in-the-know dishonest that profit at the expense of the ignorant honest.
Sooner or later all become aware of the scam and then there is a crash, also known as the Boom Crack-up. But then who knows this may be carried on for another generation.
Published: November 19, 2007 12:02 PM
Actually, the agency problem makes this "bet-the-bank" behaviour worse. Even if the shareholders get gutted as a result of a risky loan portfolio gone wrong, the executives responsible may very well not suffer at all...provided that they took cash compensation and can come up with a plausible excuse for a headhunting firm.
Published: November 19, 2007 12:49 PM
Gah, I need to learn the finance jargon in order to comprehend these articles.
Published: November 19, 2007 7:58 PM
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Published: December 27, 2007 10:13 AM
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Published: December 30, 2007 2:19 PM
I came across this article after I started googling in response to today's news : "The move announced by the Federal Housing Finance Board enables the banks in the Federal Home Loan Bank (FHLB) system to expand their holdings of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) securities."...Can somebody please explain to me how FHA, Fannie mae, Freddie Mac and FHLB are related ? Thanks - Sanjay
Published: March 24, 2008 1:44 PM
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Published: August 29, 2008 3:26 AM