Up and Down Wall Street - Alan Abelson
"...Charlie Peabody is a professional worrier (as readers of this space know,
he's a bank analyst for Mitchell Securities, and a darned good one). What
he's especially worried about now is the Federal Home Loan Bank System,
the FHLB, for short.
This is the least visible but by no means the least important of the so-called
government-sponsored enterprises, the most prominent of which are Fannie
Mae and Freddie Mac. The GSEs, as they're called, have lines of credit with
the Treasury; but their combined borrowings last year of some $7 trillion
dwarf the $2 trillion of the Treasury itself.
Recently, Rhonda Brammer chatted with Charlie on why he's worried about
the system. And what follows is a distillation of what she found out.
He's bothered by the fact that unlike Fannie and Freddie, the FHLB flies
pretty much under the radar screen, and its reports are issued only after a
sizable lag (the '99 annual, for example, is due in May). That's not the kind of
disclosure Charlie would like to see in an enterprise that's huge, highly
leveraged, growing rapidly, operates on razor-thin margins and owns a slug of
derivatives.
More specifically, he estimates that the system was leveraged 21-to-1 at
yearend. It boasts assets of $531 billion and derivatives of $410 billion (the
notional value of "interest-rate exchange agreements"). In the most recently
reported nine months, margins were a meager 24 basis points on
interest-bearing funds.
Charlie is troubled by the fact that, like the S&Ls in the 'Eighties, the FHLB
borrows short and lends long. Its '99 borrowings encompassed over $3
trillion in consolidated obligations, or COs. These are mostly overnight funds
that are constantly being rolled over.
Of especial concern, he feels, is that despite the 45% rise in advances in the
first nine months of last year, spread income rose only 17%. That means
margins must be getting squeezed.
He also believes the FHLB's derivative position is increasingly under water.
Last reported in the '98 annual, the system had a $1.7 billion unrealized loss
on some $382 billion in derivatives.
And things aren't helped by a bill recently introduced in Congress that would
remove the government's lines of credit to the FHLB and the other GSEs. The
legislation, Charlie concedes, isn't apt to become law this election year. But
2001 could be a different story.
Even the prospect of such changes already has roiled the market for the
securities of the affected agencies and prompted one huge fund, PIMCO, to
sell its mortgage-backed bonds issued by Fannie Mae and Freddie Mac and
put the proceeds in Ginnie Maes, which are fully guaranteed by Uncle Sam.
It's Charlie's view that the FHLB has the potential to cause much greater
disturbances affecting the entire economy.
So if you run into Charlie, no need to ask him why he looks so worried."
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