Countrywide’s FHLB Bailout

I agree with Chuck

Schumer and Nouriel

Roubini that the $51 billion lent to Countrywide by the Federal Home Loan

Bank of Atlanta smells very fishy. Yes, it’s collateralized by $62 billion in

mortgages, and it’s entirely possible that FHLB Atlanta has the sophistication

necessary to determine that $51 billion is a reasonable lower bound for the

value of those mortgages. But $51 billion is an enormous sum of money in anybody’s

books, and FHLB Atlanta’s exposure to Countrywide is now a whopping 37% of its

total outstanding advances. (Actually, it was 37% at the end of September; it

might be even more than that today, we just don’t know.) No reasonable lender

would put so many of its eggs in one basket – especially a basket as fragile

as Countrywide.

Schumer and Roubini are also right to be pointing fingers at the Federal Housing

Finance Board, FHLB’s regulator. You haven’t heard of FHFB? Neither had I, until

now. There are way too many regulators in Washington, and it’s virtually

impossible even to keep track of them all – let alone to hope that they

all have a level of competence necessary to keep up with all the recent developments

in structured finance and credit products. The answer to this problem is not

to beef up FHLB, but to merge it – and most of the other underfunded Washington

regulators – into one super-regulator like the Financial Services Authority

in the UK.

A similar lack-of-effective-regulation problem applies to Countrywide itself,

which, being a lender and not a bank, is regulated by the Office of Thrift Supervision.

Again, it’s not – or not only – that the OTS should have been more

on the ball. Rather, it shouldn’t exist in the first place: it, and the FHFB,

and OFHEO, and the OCC, and the FDIC, and the NCUA, and all the other financial-services

regulators, should all get bundled up and put under the aegis of, say, the Federal

Reserve, which does at least seem to have a reasonably good idea what’s going

on at any given time.

Where I part company with Roubini is when he says that Countrywide should have

been nationalized. Since Countrywide is not a bank, the government can and should

simply let it fail, if it becomes insolvent. If it’s wrong to bail out Countrywide

by stealth, through the FHLB, it’s equally wrong to bail it out by nationalizing

it. There are no depositors at Countrywide who would lose money if it closed;

its borrowers, meanwhile, have mostly been securitized and parcelled out across

the globe and across many different servicing companies already. Nationalizing

Countrywide wouldn’t help them, so there’s no reason to do it.

Update: As shadow says in the comments, Countrywide

does actually own a bank, which really only serves to complicate things further.

As to the question of whether a loan constitutes a bail-out, well, most bail-outs

come in the form of loans. The question is really whether the borrower could

have raised as much money as cheaply elsewhere. And the answer, in this case,

I think, is clearly no.

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