Now that Fannie Mae and Freddie Mac have been nationalized, attention is turning to the third giant housing-finance network, the Federal Home Loan Bank System. While the acronym reads FHLB, it is pronounced “Flub,” a sobriquet closer to the current perception that it has strayed far from its original mission and made large, risky loans to banks that have then failed.

As we explain in our current Research Reports, FHLB both serves and is owned by its 8,100 member banks. The 12 regional branches of FHLB had liabilities exceeding $1.4 trillion at the end of September, a rise of about 40 percent in less than two years. As the chart shows, this left the FHLB System with more debt than either Fannie or Freddie.

Critics say that such rapid expansion has come about in part because the FHLB System has not worried much about whether the banks it lends to are creditworthy. Three recent examples stand out.

The Atlanta FHL Bank lent Countrywide $50 billion before it collapsed and was bought for a song by Bank of America. IndyMac borrowed $10 billion from the San Francisco FHL Bank before it failed last July—and cost the Federal Deposit Insurance Corporation a record $9 billion. In the nation’s largest bank failure in history, Washington Mutual borrowed over $50 billion from FHL Banks before it ended up being bought virtually as scrap by JP MorganChase in mid-2008.

Now a new problem has emerged at the Boston FHLB—as underlined by reports in the Boston Globe that the Boston FHLB’s current president is being forced to retire early.

This time the problem stems from the Alt-A mortgages underlying part of the Boston bank’s assets. (Alt-A mortgages required little if any documentation, and are hence known as “liar’s loans,” or NINJA’s, meaning “no income, no job, no assets.”)

The $1.3 billion decline in the value of the Boston bank’s Alt-A related securities over the nine months ending September 30 cut its capital by about one-third, to $3.2 billion. That means that its reserves against member bank losses have shrunk dramatically.

On the other hand, the Boston FHLB was not the only troubled one of the 12 in the system. A new Moody’s report estimates that the 12 together have suffered paper losses of $13.5 billion (or 25 percent of their capital) on subprime, Alt-A, and other nonstandard mortgage-backed securities. How dangerous such losses will turn out to be remains to be seen. But they were serious enough in Boston to lead to a regime change.

AIER took our own look at the confusion at the Boston FHLB a few weeks ago, when we were researching the lead story in the current Research Reports, “First Fannie and Freddie—Now ‘Flub?” A call to the Boston bank seeking information about the system’s balance sheets was met with the spokesperson’s comment that “The bank answers inquiries only for member banks,” or words to that effect. Then she hung up on us. 

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