Silvergate’s silver lining: Federal Home Loan Bank flaws are exposed


It has not been a happy new year for the Federal Home Loan Bank of San Francisco or for the $1 trillion Government Sponsored Enterprise (GSE) of which you are a part.

revelations that the $109 billion asset bank funded the crypto industry was followed by charges of “systemic racism” brought against it by its own members. All this while your regulator in Washington conducts a comprehensive review of the GSE.

Earlier this month, reports surfaced that the bank had loaned one of its members, Silvergate Bank, $4.3 billion at a time when Silvergate was experiencing a bank run by their depositors. As bad as it was, it turns out that the Silvergate warehouse leak was caused by the implosion of the crypto operator FTX and its accused founder, Sam Bankman-Fried. there followed credible accusations in american banker by one of its own members that the bank is engaged in “wholesale red line” and is reaping “extraordinary profits”.

If the Federal Home Loan Bank (FHLB) of San Francisco were a bank (it isn’t), examiners would have been on the scene immediately asking direct questions. Questions like: “Did you know that Silvergate was losing deposits fast when it lent you $4.3 billion of taxpayer subsidized money? If you knew, would you think your organization had replaced the Federal Reserve as taxpayers’ lender of last resort to failing banks? Yes, you did it not You know, what kind of due diligence are you running? Did you know that Silvergate is reportedly a key player in the cryptocurrency industry? If you knew, how would lending to a crypto bank square with your housing mission? Yes, you did it not You know, let us introduce you to a term familiar to all other bankers: Know Your Customer.

If FHLB of San Francisco were a publicly traded company, its share price would likely plummet, new leadership would be sought, and investment bankers would be hired to explore the company’s strategic alternatives.

But FHLB of San Francisco is neither a bank nor a publicly traded company. It is an arm of the federal government created by Congress. in 1932 to stimulate housing financing. His support from taxpayers is deep and undeniable.

For example, you have a credit line of the US Department of the Treasury FHLBanks and the interest on its debt issuances are exempted of federal and state taxes. Congress gave FHLBanks a “super levy” about the FDIC, so every time one of their member banks goes bankrupt, they never lose a dime. Lest there be any doubt about government backing, Congress inserted the word “federal” into the names of each of the 11 FHLBanks.

The FHLBanks couldn’t issue a dollar of debt without taxpayer support. That support is the basis of his high credit ratings. It’s yours sine qua non.

Now, the cardinal rule of crisis management is “Tell the truth.” That rule went out the window when San Francisco’s FHLBank claimed it receives “no taxpayer assistance.” No one bought this bogus attempt to distance itself from the taxpayers who nurture it. The bank was forced to mount a second line of defense days later.

in a careful care public statement, San Francisco’s FHLBank later claimed to have “no supervisory responsibility” over the operations of crypto lender Silvergate, thus apparently having no knowledge of its crypto activities. call this the bank “White House” defending: Paraphrase Claude Rains’ character from the movie, “I’m shocked, shocked,” that the crypto exchange was happening here, as the dealer handed him his winnings.

It’s tempting to dismiss the Silvergate fiasco and the bank’s clumsy response to the subsequent crisis as just a Federal Home Loan Bank gone rogue. That would be a mistake.

FHLBank of San Francisco did not make up the fiction of no taxpayer assistance. He got that blurb from the FHLBanks Council, his Washington lobbyist, who advertises on his website, “Each FHLB operates independently and receives no taxpayer assistance.” He speaks for all 11 FHLBanks by defending this elaborate system from what critics have called “corporate wellness.

Detachment from reality is a strategic weapon of the 11 FHLBanks. Believing their own rhetoric leads them to act antithetical to the interests of the taxpayers who finance them and to turn their backs on the communities they were meant to serve.

When the Federal Housing Finance Agency (FHFA) which regulates FHLBanks announced its “comprehensive review” of the system last summer, was responding to simmering discontent that the FHLBanks had become “largely Irrelevant.” Many ruled out the exercise as a bureaucratic waste of time. Even reformers were skeptical that the FHFA had the authority under its governing charter to make significant reforms.

Silvergate has changed all that. Now, it’s obvious that FHLBanks are not only irrelevant, they can be dangerous. Silvergate has succeeded in highlighting the flaws in this 90 year old system.

There’s an old saying in Washington that goes, “Something is impossible until it becomes inevitable.” sandra thompson, who runs FHFA, no longer has the option to make significant changes to the FHLBanks. Silvergate has given him the mandate to do so.

For decades, the FHLBanks have fed on complacent regulators and a protective Congress. Your regulator is no longer accommodating. Congress will soon tire of defending the indefensible.

Cornelius Hurley teaches financial services law at Boston University School of Law. He served as an independent director of the Federal Home Loan Bank of Boston from 2007 to 2021.

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