Wednesday, January 21, 2009

A wave of bank failures soon?

The January 9 cover of American Banker said eight out of 12 Federal Home Loan Banks (FHLBs) would have less than the minimum regulatory capital if losses from mortgage-backed securities were deducted.

Dan Ferris makes this argument:

On Friday, the Pittsburgh FHLB said permanent losses could exceed the bank's retained earnings – which has never happened in the FHLBs' 76-year history.

This is a big deal because, like with Fannie and Freddie, FHLB securities are owned by all FHLB member banks. There are currently more than 8,000 members, all of which own shares in their regional FHLB. When the FHLB fails – which is inevitable – thousands of banks holding FHLB securities will take writedowns. That'll bring many banks already weakened by losses in Fannie and Freddie preferred stock closer to insolvency.

Understanding government's role in the financial crisis is a test. If you don't understand the crisis happened not in spite of government "insurance" schemes and regulation, but rather was aided, abetted, and compounded by government interference in mortgage and banking, you fail the test.

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