Has anyone done any reachearch on Federal Home Loan Banks? What kind of bailout will that cost.
The next shoe to drop. Unless you follow the banking industry closely, you probably haven't heard of the Federal Home Loan Banks. But the FHLBs are vitally important as a source of funding for U.S. banks both large and small. There are 12 of them spread around the country — in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle, and Topeka.
The FHLBs own billions and billions of dollars worth of mortgage backed securities. Those securities have plunged in value. So just like their banking customers, FHLBs are facing potentially huge write-downs on their portfolios. They may also be losing money on derivatives they employ.
And that's what is stressing the system.
The Seattle FHLB just warned that it may miss one of its capital targets. It may be barred from paying dividends on the stock member banks hold in it, potentially impacting those institutions counting on the money.
The San Francisco FHLB also said earlier this month that it was facing impairment charges, and that it wouldn't pay a fourth-quarter dividend as a result.
Moody's recently warned that eight out of the 12 FHLBs could ultimately face capital problems thanks to losses on their $76 billion of mortgage securities not backed by Fannie Mae and Freddie Mac.
Now here's where it gets really interesting: While many investors have never heard of the FHLBs, they collectively have roughly $1.25 trillion — with a "T" — in debt outstanding. That makes them the biggest borrowers in the U.S.— behind the federal government! Then there is the insurance co. The industry's so-called statutory surplus, or difference between assets and liabilities — plunged 24%, or $76.8 billion, last year to $237.3 billion, according to research firm Conning & Co.
In an effort to rescue their collapsing balance sheets, some insurance firms are trying to get government bailout money by buying up teeny-tiny thrifts and banks.
For example, Lincoln National, an insurance firm with $173 billion in assets, is purchasing the miniscule Newton County Loan & Savings of Indiana (total assets: $7 million). That transaction could give Lincoln access to $3 billion in TARP assistance.
But that's mere peanuts compared to what the ultimate cost may be ...
One estimate says the insurance industry may have to raise up to $50 billion in capital. Unless market conditions ease up, that kind of money just won't be available from private investors. And that means we're staring square in the face at yet another black hole— one that Washington is already being called upon to fill.
The consulting firm Mercer recently estimated that the pension funds of big U.S. companies are underfunded to the tune of $409 BILLION! At the end of 2007, they were running a $60 billion surplus. That huge swing could drive up corporate borrowing costs and drive down corporate earnings.
It could also lead to reduced business investment as companies are forced to divert money from equipment and facilities budgets to their pension funds. Advisory firm Watson Wyatt recently estimated that U.S. corporations will have to boost pension fund contributions to $111.2 billion in 2009 from $50.5 billion last year.
Now it's true that the government-backed Pension Benefit Guaranty Corporation (PBGC) insures the basic benefits for more than 29,000 plans. But with so many companies falling into bankruptcy these days, it's increasingly likely the insurance premiums the PBGC receives won't be enough to cover its obligations.
The agency was already running a deficit of more than $11 billion as of September 30. And that number is poised to rocket higher. Just call me little miss merry shunshine.