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Troubled Banks Get a Closer Look

As our story pointed out Thursday, investors are worried about a lot of banks lately — including the Federal Home Loan Banks, the 12 regional institutions that are a crucial source of low-cost mortgage money to many other banks.

For years, the obscure banks had a reputation for poor risk controls and sloppy accounting, as regulators looked the other way, investors said. The banks also were used as a lender of last resort as the credit crunch tightened, lending billions of dollars to keep banks like Countrywide Financial and Washington Mutual afloat. Those banks failed anyway, and now the Federal Home Loan Banks are in trouble because of losses on risky mortgage-backed securities. Based on their reputation, Wall Street firms think their books may be in worse shape than they’ve revealed.

But all this could change, Bloomberg reports. The banks’ new regulator, the Federal Housing Finance Agency, plans to draft new rules for both the banks and for mortgage giants Fannie Mae and Freddie Mac, which the agency also now oversees. From Bloomberg:

The Federal Housing Finance Agency plans to propose new financial requirements next week for Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. The regulatory agency may place new restrictions on Fannie and Freddie’s investments and will revamp capital requirements for the home loan banks, director James Lockhart said in an interview. Under draft regulations “that everyone fought long and hard for,” the agency will determine the “size and composition” of Fannie and Freddie’s $1.7 trillion combined mortgage portfolios, Lockhart said yesterday. He said his agency also plans to release new minimum capital rules for the 12 regional FHLBanks by Jan. 27, as called for by Congress when it enacted legislation in July to strengthen oversight. “The 14 of them are so critical to this mortgage market,” Lockhart said of the government-sponsored enterprises his agency regulates.

Looks like things are changing quickly, with daily exposés of banking misdeeds and a new administration in charge. The idea of cracking down on these enterprises would have been considered radical just a year ago. But when Merrill Lynch doles out billions of dollars for executive bonuses three days before its sale to Bank of America – which needed billions of dollars in government bailout money to seal the deal – the days of anything goes in the financial sector are quickly drawing to a close.

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