MBS Losses Could Force Takeovers of FHLBs
By Steven Sloan

Concern is mounting that losses on private-label mortgage-backed securities could exhaust the capital of several Federal Home Loan banks, sources inside and close to the system said this week. In a worst-case scenario, eight of the banks would be undercapitalized if they were forced to recognize these losses, according to a report issued Thursday by Moody’s Investors Service Inc. What would happen next is the source of debate, with options ranging from regulators putting one or more of the 12 banks into conservatorship to forcing healthy ones to support struggling ones. Another concept being discussed would call on healthy Home Loan banks to divert some of their capital to weaker ones. A far less attractive alternative would be to require Home Loan bank members to raise more capital. But Karen Shaw Petrou, managing director of Federal Financial Analytics Inc., said that with capital already thin at many financial institutions, such a move could spark a clash with banking regulators. “Calling capital from members in the current situation would certainly be something the FHFA could seek to have the banks do,” she said, “but I would think the bank regulators, most especially” the Federal Deposit Insurance Corp., “would object to that and would create a profound confrontation in the regulatory arena.” The Home Loan banks are continuing to cry foul over the accounting issue.

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