CBO called out the Federal Home Loan banks. It's now up to Congress.

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"Corporate welfare" and a "gravy train" for bankers is how one current regulator and one former regulator described the Federal Home Loan Bank System at a recent public meeting.

The Congressional Budget Office is not prone to such rhetorical flourishes. Yet, in a recent report CBO, in its trademark nonpartisan and analytical style, validated these characterizations of the $1.2 trillion government sponsored enterprise. The report, "The Role of the Federal Home Loan Banks in the Financial System," adds color, context and cold, hard facts to our understanding of an enterprise that has long been shrouded in obscurity.

Every member of Congress, whether her priority is budgetary restraint, housing, or both, ought to heed the CBO report.

To begin with, CBO settles the long-running dispute over whether the Home Loan banks are subsidized by U.S. taxpayers. CBO's conclusion: They are. Taxpayers subsidize the Home Loan banks at the rate of $7.3 billion per year according to CBO. The subsidy takes the form of the banks borrowing large amounts in the global bond markets using the implied taxpayer guaranty and their exemption from paying federal, state and local taxes.

CBO goes on to answer the important question: What do the taxpayers get in return for this massive annual subsidy? CBO's conclusion: very little. According to CBO, the Home Loan banks' only return to the taxpayers was their $355 million expenditures for affordable housing. That is, 4.8% of their annual taxpayer subsidy, or less than $1 for every $20 of taxpayer funding.

Of course, these findings raise the question: Where did the rest of the taxpayers' subsidy go? CBO concludes that it went to the Home Loan banks themselves, and to their member banks and insurance companies in the form of low-cost funds and robust dividends.

But there is more to the CBO story.

CBO's headline subsidy number of $7.3 billion underestimates the current taxpayer subsidy. However, CBO provides a handy reference guide to adjust the taxpayer subsidy for the Home Loan banks' most recent year. The annual taxpayer subsidy based on actual 2023 data reported by the Home Loan banks is not $7.3 billion, it is $10.9 billion according to my application of CBO's methodology.

CBO euphemistically refers to the difference between the subsidy and the public benefit as a "pass through" to the banks. That is an annual $10.1 billion pass through! It is unfortunate that this is where CBO's report ends, because it is that $10.1 billion annual pass through, that contains the "waste, fraud and abuse" that characterizes the Home Loan banks.

It is wasteful, for example, for the banks to use taxpayer supported money to hire phalanxes of lobbyists, lawyers, public relations experts and consultants. These highly paid foot soldiers do not serve the public interest, even though they are subsidized by the taxpayers. They maneuver unchallenged in the public, legislative and regulatory arenas, promoting only the interests of the Home Loan banks as profit-seeking enterprises. This is how Fannie Mae and Freddie Mac operated before they were placed in conservatorships.

For years, the Home Loan banks have insisted falsely that they "receive no taxpayer assistance" — language that was only recently removed from the Federal Home Loan Bank System's website. The latest combined annual report for the eleven Home Loan banks fails to mention the word "taxpayer" on any of its 279 pages.

The CBO report lays this issue to rest. Taxpayer assistance is the sine qua non of the Home Loan banks.

Money market mutual funds that buy most of the Home Loan banks' debt recognize that this claim is poppycock; otherwise, they would not touch the banks' debt. Regrettably, the Home Loan banks believe their own falsehoods, or at least they do when it comes to setting their own executive compensation. Executive pay at the Home Loan banks emulates the private sector rather than the public taxpayer-supported sector of which they are part.

This should all sound familiar. It is the same false claim that Fannie and Freddie made before they were bailed out by the taxpayers. One difference between Fannie and Freddie and the Home Loan banks is that Fannie and Freddie had erstwhile competitors. The Home Loan banks have none.

Therefore, it is abusive for the Federal Home Loan Bank of New York and the other ten banks to spend in the neighborhood of $3 million to compensate their CEOs. The role of a Home Loan bank CEO is that of a government official. The job is simply to prudently distribute government-supported funds to the members by way of low-cost advances. The more he or she makes, the less is available for housing and community development.

Politics and policy

CBO report pegs $6.9B government subsidy to Federal Home Loan banks

The Congressional Budget Office put an estimate on the net government subsidy provided to the Federal Home Loan Bank System, including the so-called "implied guarantee," on bonds priced and sold to investors.

By Kate Berry

March 13

Contrast that limited responsibility with the CEO of the Federal Reserve Bank of New York. His institution plays a central daily role in the global capital markets and serves as fiscal agent for the Treasury Department. He sits on the pivotal Federal Open Market Committee, setting the monetary policy of the nation. For this he makes less than 25% of what his counterpart at the Federal Home Loan Bank of New York makes.

Multiply the wasteful use of these taxpayer resources by eleven (the number of Home Loan banks), including eleven C-suites of overpaid executives, and you have some idea of the level of abuse involved.

It is abusive to borrow funds at rates kept artificially low by a public subsidy, and to use those funds to pay dividends to the Home Loan banks' members at a rate of 9.75%. Such is the case at the New York bank, with the others following close behind.

It is abusive for the Home Loan banks to distribute tens of billions in taxpayer-supported funds to failing banks such as Silicon Valley Bank ($15 billion), First Republic Bank ($28 billion) and Signature Bank ($11 billion).

The CBO report unmasks this abuse by pointing out that losses on these loans do not magically disappear when the borrowing bank fails, as the Home Loan banks have suggested. Rather, the losses are passed on to the Federal Deposit Insurance Corp. via another part of the taxpayer subsidy enjoyed by the Home Loan banks, known as the "super lien." And who stands behind the underfunded FDIC? You guessed it: the taxpayer.

Similarly, it is abusive to use cheap taxpayer-supported funds to prop up New York Community Bank ($13.3 billion) while Steve Mnuchin and his investors look for a payoff. If anything, as Bagehot says, such advances should be at "penalty rates."

Any wonder why the banking industry is so protective of the taxpayer-funded Home Loan banks?

Imagine a charity that gives just $1 of every $20 that it raises to its stated cause and the rest it gives to insiders. No one would contribute to such a charity.

And yet, we as taxpayers seem to tolerate this misappropriation of taxpayer resources. Why?

It comes down to two things: money and influence. The Home Loan banks have benefited from a docile Congress and regulators who, for the most part, have preferred to look the other way rather than confront the realities brought before us by CBO's report.

About a year ago, I interviewed Federal Housing Finance Agency Director Sandra Thompson, who regulates the Home Loan banks. She said then, "The status quo is unacceptable." That understatement was a month before Silicon Valley Bank, et al. nearly crushed the banking system. She followed her admonition with some modest and well-reasoned recommendations for reform. Those recommendations are imperiled by money and influence.

One can be certain that the Home Loan banks and their members are rooting for an election this November that will allow a new administration to dismiss Ms. Thompson on day one. Also, on their wish-list is another do-nothing Congress that will bend to their money and influence.

CBO's report, however, will transcend administrations. It will still be there as an inconvenient truth confronting the 119th Congress when it convenes on January 3, 2025. It will also confront whoever heads the Agency after Inauguration Day, January 20, 2025.