Countrywide's FHLB Bailout

I agree with Chuck Schumer and Nouriel Roubini that the $51 billion lent to Countrywide (CFC) by the Federal Home Loan Bank of Atlanta smells very fishy. Yes, it's collateralized by $62 billion in mortgages, and it's entirely possible that FHLB Atlanta has the sophistication necessary to determine that $51 billion is a reasonable lower bound for the value of those mortgages. But $51 billion is an enormous sum of money in anybody's books, and FHLB Atlanta's exposure to Countrywide is now a whopping 37% of its total outstanding advances. (Actually, it was 37% at the end of September; it might be even more than that today, we just don't know.) No reasonable lender would put so many of its eggs in one basket – especially a basket as fragile as Countrywide.

Schumer and Roubini are also right to be pointing fingers at the Federal Housing Finance Board, FHLB's regulator. You haven't heard of FHFB? Neither had I, until now. There are way too many regulators in Washington, and it's virtually impossible even to keep track of them all – let alone to hope that they all have a level of competence necessary to keep up with all the recent developments in structured finance and credit products. The answer to this problem is not to beef up FHLB, but to merge it – and most of the other underfunded Washington regulators – into one super-regulator like the Financial Services Authority in the U.K.

A similar lack-of-effective-regulation problem applies to Countrywide itself, which, being a lender and not a bank, is regulated by the Office of Thrift Supervision. Again, it's not – or not only – that the OTS should have been more on the ball. Rather, it shouldn't exist in the first place: it, and the FHFB, and OFHEO, and the OCC, and the FDIC, and the NCUA, and all the other financial-services regulators, should all get bundled up and put under the aegis of, say, the Federal Reserve, which does at least seem to have a reasonably good idea what's going on at any given time.

Where I part company with Roubini is when he says that Countrywide should have been nationalized. Since Countrywide is not a bank, the government can and should simply let it fail, if it becomes insolvent. If it's wrong to bail out Countrywide by stealth, through the FHLB, it's equally wrong to bail it out by nationalizing it. There are no depositors at Countrywide who would lose money if it closed; its borrowers, meanwhile, have mostly been securitized and parcelled out across the globe and across many different servicing companies already. Nationalizing Countrywide wouldn't help them, so there's no reason to do it.

Update: As shadow says in the comments, Countrywide does actually own a bank, which really only serves to complicate things further. As to the question of whether a loan constitutes a bail-out, well, most bail-outs come in the form of loans. The question is really whether the borrower could have raised as much money as cheaply elsewhere. And the answer, in this case, I think, is clearly no.

Comments

[Arohan]

The problem of course is if Countrywide fails, it does not automatically make all the loans (bad, marginal or otherwise) that it held on its books disappear like magic. No problem is solved by letting Countrywide fail

It is however quite possible that this particular event would be quite traumatic to the markets and the housing sector

It is in everyone's best interest to make sure that the company survives, is able to take its lumps, be wiser for it, and move on.

arohanvalue.blogspot.c...

[zylepp]

I need about $350M to get my debts under control and since no one would be helped ny my going Chapter 13 how about the Fed bailing me out? Is that the way it works?

[Ernie Montague]

As mentioned CFC owns a bank, and they are currently selling 5.5% CDs, an interest rate almost a full point higher for 1 year CDs than any other FDIC bank in the US. It is no secret the hundreds of millions in deposits the high rates are garnering are propping up the parent company. Yet another Fed funded bailout, and a legal way for CFC to gamble with Fed money.

[Chungst]

Ernie Montague said: "Yet another Fed funded bailout, and a legal way for CFC to

gamble with Fed money."

I started my career in banking and saw the creation of RTC, so it's easy to spot

misunderstood views of banking. Ernie makes a number of incorrect assumptions:
#1 As for FDIC, it charges insurance premiums based on the bank's risk profile.

That is to say Countrywide Bank pays the FDIC a risk-adjusted premium for all

those new deposits (please see:

www.fdic.gov/deposit/i...]
#2 The FDIC is not part of the "Fed." Here's what the FDIC says about itself:

"The FDIC receives no Congressional appropriations – it is funded by premiums that

banks and thrift institutions pay for deposit insurance coverage and from earnings

on investments in U.S. Treasury securities. With an insurance fund totaling more

than $49 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks

and thrifts – deposits in virtually every bank and thrift in the country."

[source: www.fdic.gov/about/lea...]

Ernie needs to recheck his facts.

[User 105798]

Banks have failed before and there are ways to ensure that depositors are protected. As for CFC, it has already wrought enough damage to the economy and, with the same management team at the helm, will probably continue to do so. Why not just let it fail and let borrowers have to turn to more responsible lenders? Otherwise, what is to stop the next CFC from giving out money willy-nilly and let the taxpayers bear the costs?

[User 121847]

Well, it is easy now to blame one company (CFC) now for all the mortgage security related issues. But reality of the fact is that everyone was making hay while the sun was shining. The mortgage lenders, the investors in the mortgage backed securities, the rating agencies and last but not the least the borrowers - who are now being made out to be naive, but actually were the most greedy.

That countrywide is able to secure credit in this market is the efficiency of their management. I do not see it as a bailout. They are using that money to make more loans. And that is their business - remember - take short term loans and make longterm mortgage loans with that credit.

[MikeW]

Socialized housing finance is the problem, not the solution. A market free of government central planning and manipulation would have its ups and downs, but would have a hard time getting into messes of the scale of the one now facing Countrywide et al.

[Steve C.]

FHLB Atlanta's exposure to Countrywide is irrelevant. The FHLB system is a cooperative. The Countrywide exposure is less than 10% of the whole FHLB system's advances so there is no death-threat to the Atlanta bank as the risk is spread across the whole system. The FHLB system assets are over $1 trillion.

Also, comments regarding a "Fed bailout" are off base and just plain wrong. The FHLB is not federally funded. It is funded by debt sold in the public markets, not taxpayer dollars, and by member (bank) investments. In that sense it is similar to Fannie Mae and Freddie Mac, though its stock is owned by its member banks, not the general public.

And no, I don't work for Countrywide or the FHLB. But I do believe that Countrywide Bank will eventually come under capital stress and may require intervention by the OTS as its option ARM portfolio quality deteriorates.

[Jay Jay]

Its in everybodies long term interests to let CFC succeed or fail on its own merits. A loan from the FHLB is a tax payer subsidy to a private company playing chicken with the economy. Paying articially low risk insurance rates does make it a real market just like a guy that pays his parents $100/month to live in their basement an independant adult. The insurance premium is enough until it isn't, and then they get bailed out. Just like national flood insurance, its self supporting with premiums until their's a major flood, then the program gets bailed out by the tax payers. If the loans given as colateral are anything like the home equity loans I see CFC hawk on TV all day long, then they're seconds and thirds and will likely be worth 0 cents on the dollar in the likely event of a foreclosure.

[forwoodenboats]

Well, I don't know the FHFB from Fun Bags, and I sure didn't learn anything from Roubini's article other than he's a testy little socialist trying to pretend he's not.
His whole article is vitriolic mumbo jumbo, and I don't need to (and can't, don't have WSJ account) read Schumer's to know he's on the "nationalize every thing we can find an excuse for" bus that's been driving congress.
I'd like to see Felix follow up on this, and get some more informative, factual comments such as chungst and Steve posted.