FHFA

Recent revelations about the Federal Home Loan Bank System have made it still more imperative to address whether at least $1 trillion of implicitly-guaranteed federal debt should be authorized to feather the FHLBs’ pockets instead of furthering public welfare.  As we detailed in a recent client report,  flat-out mission contradictions are clear in the case of a crypto-heavy bank’s use of FHLB funding as a lifeline which it surely obtained because the System can lend with impunity because it has a prior lien ahead of even the FDIC.  However, this case isn’t the only current mission conundrum.  The other is little-noticed but at least as problematic: the extent to which Home Loan Banks lend not to support homes, but instead to give foreign banks in the U.S. a tidy revenue source via a nifty interest-rate arbitrage play that disadvantages U.S. banks and may even threaten financial stability and monetary-policy transmission.

But first to the question of whether the FHLB System is required to do better.  It would seem totally obvious that Home Loan Banks issue debt through the System’s Office of Finance thanks to taxpayer benefits.  However, in connection with a discussion of the prior lien, an FHLB spokeswoman said the System operates without any resort to taxpayers.  Leaving aside the fact that the Banks don’t pay taxes and couldn’t raise hundreds of billions at near-Treasury spreads if they weren’t cushioned in the taxpayers’ bosom, the law says these entities are agencies of the U.S. Government and regulates …