FHLB equity positions – time to lower your exposure?

With all apologies to my friends at FHLB Dallas, what would happen if the FHLB system (or a single FHL Bank) went the way of Fannie and Freddie? Most banks carry FHLB stock on their books to support their FHLB borrowing activity. If you are not using all of your borrowing capacity, does it make sense to sell any excess stock you hold? I’m not proposing that we all rush to sell all of our FHLB stock, but a rational discussion of the investment in a coming ALCO meeting would be appropriate. If banks begin to pare down FHLB borrowings in response to proposed FDIC insurance assessment changes, trimming excess stock holdings may become a larger issue.

My Two Cents

It was a rough weekend to be a Tiger. All five Division I-A football programs with Tiger mascots (can you name them all?) lost. Two other weekend losers: small banks in Northville, Michigan and Eldred, Illinois that were closed Friday by the FDIC. For those counting, there have been 15 failures so far this year.

If the events of the last two weeks have provided any lessons, one near the top of the list should be “Perception IS Reality”. Whether it is an inaccurate statement made forcefully during a debate or an opinion voiced by a talking head, many people hear what they want to hear, accept inaccurate statements as fact and allow fear to snowball into irrational behavior. When you add the lifting of short sale restrictions on financial stocks, margin calls that create 2:00pm market crashes and the “who’s failing next” rumor mill to the mix, should we really be surprised that the turmoil continues? I wonder how much of this mess could have been avoided if we had removed ANY ONE of the following pieces from the equation:

· Mark to Market accounting rules

· The 2008 election cycle

· Hedge funds, short sellers and margin calls

· The FOMC’s excessively easy money stance from 2001 to 2005

Of course, if we had removed sub-prime mortgage paper from the market, perhaps Bear, Lehman, AIG, WaMu, Wachovia, Fannie & Freddie and others would still be healthy and I could spend more time talking about football. In case you were wondering, the five programs with tiger mascots are LSU, Auburn, Missouri, Clemson and Memphis. Taking the “Bad weekend to be a Tiger” theme a bit further, the failed bank in Eldred, IL is a short drive from the University of Missouri, and the failed bank in Northville, MI is not far from Detroit, home of the Detroit Tigers, who also had a dismal year. Good luck to all the Tigers this weekend, and good luck to the banks that are on the FDIC's failures-in-waiting list...

Wachovia / Citi / Wells Fargo

When Wells realized how good a deal Citi had with their $1 per share acquisition of Wachovia’s banking unit, they trumped Citi’s bid by roughly 700% AND did it without FDIC assistance. Wells was the other potential white knight all along, but backed out during the final FDIC-driven negotiations, so they knew enough to make a good offer.

The FDIC really put itself in a bind on this one. By pursuing an “open bank” resolution, the FDIC did not remove Wachovia’s shareholders from the mix, leaving the door open for a better offer that Wachovia’s board had to consider and that the shareholders would likely prefer. While the FDIC would like to get rid of Wachovia without assistance, failing to continue to support Citi’s bid would weaken the FDIC’s ability to resolve other institutions prior to failure. On Friday, Citi seemed to acknowledge that they had been bested by Wells, but the legal and regulatory implications of their rebuffed “rescue” deal may continue for a while.