We have long observed that the Home Loan Banks – united in systemic size, inadequate supervision and conflicting incentives – pose the same types of systemic risks Fannie and Freddie did before the Fall. More evidence to this effect comes in a troubling IG report showing that the System as a whole bulked up gigantically in 2009-2010 on unsecured debt to high-risk EU banks in a desperate attempt to prop up earnings as advances continued their precipitous decline. In response, FHFA notes supervisory lapses and promises a new rule. However, as before, we note that the Banks are in aggregate a troubled housing GSE that, even as EU exposures may be dropping, may well be exposed to other credit, liquidity, market and operational risks – a long-time worry increased by the light shed by the IG on internal FHLB controls (or lack thereof).
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