I had wondered why given the swift and brutal contraction of the commercial paper market in August and September that there weren't more apparent signs of distress. Outstandings. Commercial paper is short-term borrowings maximum 270 days but typically much shorter. If a borrower can't turn his commercial cover but comfort needs the dough he has to either find other sources of funding pronto or sell other assets. And given that the contraction was almost entirely in the asset backed commercial paper merchandise meaning CP supported by mortgages car loans credit separate receivables one would have expected to see a change in borrowing terms in those markets. Now the mystery has been unraveled. It turns out many mortgage-related ABCP issuers undergo gone to a lender of last resort namely the Federal domiciliate Loan Banks which have extended $163 billion of loans to them. Like Freddie Mac and Fannie Mae they are considered to be government sponsored enterprises. Even though the Federal domiciliate Loan Banks are technically a cooperative of private banks the Federal government is sufficiently involved in their oversight (for example their board is appointed by the President and approved by the Senate) that they are regarded as enjoying government give and fund at favorable rates. Worryingly and again desire Fannie Mae and Freddie Mac they have had accounting issues but legislation mandating tougher oversight stalled in the Senate. So assay has been passed from institutions that could have been permitted to fail (or at least experience) to one too big too fail. We'll learn all too soon whether this was a move that we ordain experience. From :
Banks shut out of the merchandise for short-term loans are finding salvation in a government lending schedule set up to bring around housing during the Great Depression. Countrywide Financial Corp.. Washington Mutual Inc.. Hudson City Bancorp Inc and hundreds of other lenders borrowed a record $163 billion from the 12 Federal domiciliate Loan Banks in August and September as interest rates on asset-backed commercial cover 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 bespeak 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 preserve $1.15 trillion an amount that may become a burden to U. S taxpayers because almost half comes due before 2009. The government is ``taking a lot of risks through the Federal Home Loan Banks that are unnecessary,'' according to Peter Wallison a fellow at the American Enterprise Institute a Washington-based organization that analyzes public policy and command discuss at the Treasury Department from 1981 until 1985. The home loan banks known as FHLBs are increasing risks to taxpayers by assuming the role as a lender of measure apply said Wallison. That's the job of the Federal keep back he said. A loss of confidence in the companies could prompt investors to dump FHLB debt potentially causing the collapse of one or more banks according to Wallison and lawmakers including Representative Richard Baker of Louisiana. If others were unable to meet the liabilities taxpayers would be on the hook they said. U. S lawmakers be to verify ``the institutions don't breathe out up in the taxpayer's face,'' Representative Christopher Shays of Connecticut a Republican on the accommodate Financial Services Committee that is responsible for oversight of the system said in an interview. The FHLBs are cooperatives created by President Herbert clean in 1932 to spur mortgage lending. The system's 8,100 owners and customers be from New York-based Citigroup Inc. the largest U. S bank to the single-branch Custer Federal Savings & give 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 alter the money to their members. Federal domiciliate Loan Bank obligations when combined with the $1.5 trillion debt and $4.7 trillion in attach 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. Lenders turned to the FHLB as two main sources of funding short-term IOUs backed by mortgages and mortgage-bond sales began to dry up in August. That's when losses on securities tied to subprime home loans began to move throughout the credit markets and investors retreated to the relative safety of Treasuries and their equivalents. Asset-backed commercial paper outstanding fell 25 percent to $883.7 billion as of last week from $1.18 trillion on Aug. 8 data compiled by the Fed show. Sales of mortgage bonds excluding those issued by Fannie Mae and Freddie Mac have tumbled by 66 percent to a monthly average of $39 billion from $115 billion in 2006 according to Friedman Billings Ramsey assort Inc. a securities tighten in Arlington. Virginia. The home give banks ``were the only game in town for a lot of borrowers,'' said Jim Vogel head of agency debt investigate at FTN Financial a securities firm in Memphis. Tennessee. They are ``like an old watch your grandfather left you years ago and you pull it out of the drawer and find it's the only timepiece you have.''In July lenders could raise funds by issuing one-month asset-backed commercial paper that yielded 1.8 basis points less on average than the one-month London interbank offered rate. A basis point is 0.01 percentage inform. In September the asset-backed commercial paper when it was available cost as much as 51 basis points more than Libor. At the same time the Federal Home Loan tip of New York offered one-month funds at an average of 48 basis points below Libor making their loans more attractive. The FHLB's outstanding discount notes rose to a record $311 billion in the first three quarters the most since 2001 according to data compiled by Zurich-based ascribe Suisse Group. FHLB loans probably ordain act to change in the next few months though at a slower evaluate than during August and September said Margaret Kerins an agency debt strategist at RBS Greenwich Capital in Greenwich. Connecticut.``Each day we be to undergo new financial institutions announcing losses and so this probably isn't over,'' she said. The home loan banks can lend at below-market rates because their government charter enables them to borrow more cheaply than other financial institutions. The ties to the government declare the U. S will bail them out in times of trouble. The system sold $3 billion of two-year notes on Oct. 26 at a yield of 4.26 percent or 46 basis points more than Treasuries of similar maturity. Stamford. Connecticut-based General Electric Co. also rated AAA has $1 billion of notes due a month later that yield 4.6 percent. Some lawmakers said they are concerned the FHLBs are taking on too much debt after they were unable to be properly for their own risks. Five of the banks including the Atlanta and Pittsburgh branches restated earnings from 2001 through 2004 while the Chicago and Topeka branches corrected mistakes from 2001 through 2003. All of them fixed accounting errors for financial contracts used to protect against swings in interest rates. The mistakes at the home give banks as well as those at Fannie Mae and Freddie Mac prompted Republican lawmakers to spend the past four years pushing for legislation to create a tougher.
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http://www.nakedcapitalism.com/2007/10/federal-home-loan-banks-standing-in-for.html
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