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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