By Pam Martens: September 18, 2013
On June 24 of this year, Senator Elizabeth Warren was incensed. She wrote to the Federal Housing Finance Agency (FHFA), the federal regulator of the Federal Home Loan Banks as well as Freddie Mac and Fannie Mae. Warren had just learned that Sallie Mae, a Fortune 500 company engaged in making private student loans, had obtained an $8.5 billion line of credit from a Federal Home Loan Bank. Sallie Mae had been borrowing on its line of credit at 0.23 percent, then making student loans at 25-40 times that rate according to Warren.
Warren reminded the federal regulator that “Congress established the Federal Home Loan Bank System to serve as a reliable source of funding to local banks and other community lenders that offer families home mortgages.” Warren cited a report from the Consumer Financial Protection Bureau showing that significant levels of student debt pose a barrier to Americans trying to buy their first homes.
With housing stalling and mortgage credit still tight for many borrowers, Wall Street On Parade decided to delve into the financial filings of each of the 12 Federal Home Loan Banks and see who else might be getting a windfall from a program set up to help local lenders compete with the big boys. According to the Federal Home Loan Bank of Boston, the system’s mission is as follows: “By supporting community-based financial institutions, the Federal Home Loan Bank System helps to strengthen communities. The System directly benefits consumers by helping to ensure competition in the housing-finance market.” Got that – competition.
The mission, like so much else that Wall Street touches, seems to have run off the tracks. As of June 30, 2013, three of the giant, global, Wall Street banks are the largest borrowers from the Federal Home Loan Banks, with JPMorgan way out in front with borrowings of $61.840 billion. And it’s not borrowing from just one FHLBank, it’s borrowing from three and grabbing 65.8 percent of all advances from the FHLBank of Cincinnati, which services Kentucky, Ohio, and Tennessee.
Bank of America Corporation comes in second with borrowings of $33.844 billion. Citigroup, parent of Citibank, is next with $25.702 billion. These 3 banks, out of 7500 members of the Federal Home Loan Banks, already control over $2.539 trillion in domestic deposits in their FDIC insured subsidiaries – a whopping 41 percent of all U.S. domestic deposits. Because they are considered too-big-to-fail, they already receive a huge, lower-cost borrowing advantage over community banks and credit unions. With all those deposits, why do they need to go to the well of the FHLBanks?
The suspicion that something is amiss is heightened by the fact that although Wells Fargo is the largest mortgage lender in the country, its name does not appear on the list of the top ten borrowers of the Federal Home Loan Banks. According to Mortgage Daily, Wells Fargo originated approximately $112 billion in mortgages in just the second quarter of this year. If Wells Fargo is able to use its FDIC insured deposit base to lend to home mortgage borrowers, why can’t the other three large deposit holders?
To get a proper sense of the situation, consider what the U.S. Senate’s Permanent Subcommittee on Investigations found that JPMorgan was doing with its deposits in the first quarter of last year. The company, at that time, had “surplus” bank deposits of $350 billion residing in its Chief Investment Office. It allowed traders in London (two of whom are now under criminal indictment) to buy as much as $157 billion notional face amount of high risk credit derivatives.
The episode is known as the London Whale. JPMorgan has admitted to at least $6.2 billion in losses. The full extent of the losses are not known. The company is expected to announce a settlement of the matter with some of its regulators this week, paying out an expected $700 to $800 million in fines.
Despite being the largest borrower from the FHLBanks, JPMorgan is also being sued for fraud by the FHLBank of Pittsburgh. According to the FHLBank’s June 30, 2013 financial filing, on September 23, 2009, the FHLBank filed two complaints in state court for the recovery of the Bank’s losses relating to nine private label mortgage-backed securities (MBS) purchased from J.P. Morgan Securities, Inc. in an aggregate principal amount of approximately $1.68 billion. According to the filing, some claims have been dismissed but there remain claims against JPMorgan “for fraud, negligent misrepresentation and state and federal securities law claims….”
The FHLBanks’ Office of Finance issues periodic, combined financial reports for all 12 FHLBanks which may be understating the true extent of the concentration of borrowings by JPMorgan, Bank of America and Citigroup. The combined statement for June 30, 2013 shows JPMorgan with 13.7 percent of all advances; Bank of America with 7.5 percent and Citigroup with a mere 5.7 percent.
But in key regional markets, all three Wall Street banks are dominating borrowings at some of the FHLBanks. (I asked the FHLBanks’ regulator, the Federal Housing Finance Agency, why the Wall Street banks are allowed to borrow at multiple regional FHLBanks. I’ve been promised an answer soon and will report on it when it comes.)
In addition to grabbing 65.8 percent of the advances at the FHLBank of Cincinnati, JPMorgan is also the largest borrower at the FHLBank of San Francisco with 20 percent of all advances. As of the end of the second quarter of this year, JPMorgan, Bank of America and Citibank consumed 49 percent of all advances at the FHLBank of San Francisco.
At the FHLBank of Pittsburgh, the Bank suing JPMorgan for fraud, Chase Bank USA, a unit of JPMorgan, comes in as the second largest borrower with 20.3 percent of advances. Sovereign Bank, N.A. is the largest at 21.9.
According to Inside Mortgage Finance, Citigroup held only a 3.9 percent market share of the mortgage lending market as of the end of the second quarter. But at the FHLBank of New York, it took 24.55 percent of all advances for the same time period and 12 percent at the FHLBank of San Francisco.
The Federal Housing Finance Agency sued all three Wall Street banks, along with 11 others, over the past two years for fraud and/or misrepresentations in the sale of mortgage backed securities to two other government sponsored enterprises, Freddie Mac and Fannie Mae. Citigroup settled with the agency in May.
Update: According to a reliable regulatory source, borrowing at multiple FHLBanks is accomplished as follows:
“If a bank holding company, like Citigroup or JPMorgan Chase, has separately chartered commercial bank subsidiaries that are located in different regions around the country, each of those depository institutions can become a member of its local FHLBank and can borrow from its local FHLBank. But none of these commercial bank subsidiaries can borrow from more than one FHLBank.”