Saving Troubled Banks

There’s another quasi-governmental agency that’s lending hundreds of billions to troubled banks. Fortunately, it’s not a mess. Yet.

Jul 29, 2008

Daniel Gross – Newsweek

The Federal Reserve’s extraordinary efforts to help investment banks have effectively put the taxpayer on the hook for enormous potential losses. If borrowers can’t make good on their debts, we could end up paying tens or hundreds of billions to cover losses tied to Bear Stearns, mortgage-backed securities at other banks, and the Fannie Mae and Freddie Mac debacle.

But the actual amount of credit extended so far through these public-rescue efforts pales in comparison with the credit that has quietly been extended to banks in the past year—another lifeline that taxpayers could end up paying dearly for. Here’s the story: Last summer, as the subprime rot spread throughout the credit market, the process through which banks make loans to borrowers and then package and sell them to investors came to a screeching halt. For the past 12 months, an obscure agency created by President Herbert Hoover during the Great Depression has come to the rescue of the banking industry. It is called the Federal Home Loan Banks.

Like Fannie Mae and Freddie Mac, the FHLB (here’s Hoover’s July 1932 signing statement, a brief history, and an overview) is a government-sponsored enterprise. But it differs from the wounded giants in some significant ways. Instead of being owned by public shareholders, as Fannie and Freddie are, the 12 independent regional FHLBs are owned by their 8,100 members. Banks large and small, representing about 80 percent of the nation’s financial institutions, own shares in the FHLB and share in the profits.



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