YouSaid · the spoken record

Michael Ericson

lines on the record: 111
first: 2023-08-18
most recent: 2023-08-18
sittings or episodes: 1
sources: podcast

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“Risks that we have embedded in each one of our organizations and certainly have the resources in place in order to manage that. So I would say those are the main areas that I would focus on. And I think the Federal Home Loan Banks do an excellent job in managing all of those risk exposures”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Liquidity to meet the demands of our member institutions. We have a number of robust frameworks in place in order to manage that. We spent quite a bit of time in how do we manage the credit risk, certainly the member credit risk exposures in the federal home loan bank. What do we do to protect the risks associated with that? Certainly we have robust practices to monitor unsecured counterparty exposure risks as well. That's something that we are also keenly aware of and manage very tightly across the federal home loan bank system. And the last area that I would say is a big focus of ours is the operational risks. And each one of us manage very complex financial institutions. And we need to ensure that we have robust practices in place to manage the operational risks, the cybersecurity risks, the model.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“I think we've actually, in the conversation today, covered a lot of the key risks that I would be focused on. The first and foremost that comes to mind is ensuring that the federal home loan bank system protects the debt franchise that it has. And the debt franchise is critically important because that allows us to provide the funding and liquidity that our member institutions expect from the federal home loan banks itself. And so ensuring that we are doing things to protect the safety and soundness of the system is vitally important. And I think we do an excellent job in relation to that. The other areas of risk that certainly we would focus on is certainly in the market risk where we spend quite a bit of time looking at what is the market risk exposure of the federal home loan banks. How do we manage the market risk and liquidity risk that we would have in ensuring that we hold”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“I would just say that I think that's more rumor than probably reality. I do think that all of the members that have access to the federal home loan bank, they all play a very critical role in housing and housing finance in the United States. And I think that if there is any action that would need to be taken in relation to who should have access or not, that's the role of Congress to play. And so each one of our member institutions today certainly play a key role for the federal home loan bank system in housing finance in the United States.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Shrink accordingly. That would be kind of like shooting yourself in the foot because you worried about a problem that may not be manifest. That's a long way of saying, I don't know what they're going to say. If they raise a problem, I think we should look into it. We should verify if it is or isn't happening. If it is happening, we should fix it and we should move on. I don't like binary solutions. I worry about X. Let's amputate your leg. It looks like you have a toe problem. This is a bad way to do policy. So I don't know what they're going to go out. And I know a couple people who will now have listened to this probably eventually and feel free to bug me about my view.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“If the question is, we wonder if the big banks are getting a fair shake or getting too good of an arrangement. If that's the question, let's put in place some double checks to be sure that isn't happening. If it is happening, then we have a remedy. I would so much prefer that than shrinking the whole system and have the Chicago and”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“That similarly situated, if perhaps smaller banks have equal access to the benefits of being a cooperative member of the federal home loan bank. If the answer to that is no, it's not the case. The big players take advantage and they get more and practically they get all this and it comes at the expense of smaller players, well then something has to be done and we need to modify how we operate. But I will tell you that all the evidence points to the reality that the advances and the benefits of being a co-op member are shared equally across all the members regardless of size. And so what I hope that the agency does is raise the problem because people spoke about the risk of this problem, oftentimes without really citing what it was. I mean, Jack, you'll agree, I think. People just don't like really Big Bangs, right? They're not flattering about them. They assume something nefarious is going on. And I don't even need to speak to that. I think instead.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“I wish I knew the answer to that question because we've heard similar rumors and certainly that came up a lot in the discussions. I'll tell you what I think is the right way to look at it and what I hope might happen. And I think that's the best I can do because I really don't know what they're going to say or propose. You know, if it's an issue of total risk for the Federal Home Loan Banks, in other words, part of their observation is, you know, we want you to be more thoughtful about your portfolio of advances regardless of who they come from and be even more cautious than you already are. I'm okay in terms of federal home loan bank system taking its riskiness from very, very low to even lower if that's the desire of the regulator. And there's several ways to do that. And maybe one way is to think carefully about ratios of total advances. But here's what I think might be coming of it. And in my view, would be better. And that is to ask the question and to maybe put a better way of double checking this in place. Is it the case?”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“The federal home loan banks have committed to doing more. We've talked about 10% of our earnings getting set aside. I can say in Chicago we do abundantly more than 10% through voluntary programs, through other advances related activities and other, we have a community first fund as well where we provide funding and support to CDFIs in our district. So it's really robust in what we're doing, but that's where we're getting more and more feedback.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“By and large, I can say for Chicago, we have a number of community financial institutions and rural Illinois, rural Wisconsin beyond just the city of Chicago or Milwaukee or Madison. We are providing a critical source of funding and liquidity to those members. And they are doing loans in their community to support the communities. And I think that element is oftentimes lost in the whole discussion. That is absolutely critical in providing that funding and liquidity to the communities across the United States. And we're no different than some of the other federal home loan banks and the other districts. But, you know, that's a critical role that we play. And certainly there has been no pushback on that. And what we are hearing is that we need to be doing more to support community investment and affordable housing.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I think it's important to keep in mind is the federal home loan banks staying true to its mission of providing funding and liquidity to our member institutions. And we are. And so to the extent that our members are pledging mission oriented collateral to the banks themselves. The mission oriented collateral being mortgage loans, home equity loans, commercial real estate, mortgage-backed securities, et cetera, to the extent that our member institutions are pledging that collateral and need liquidity from the banks, we're certainly going to continue to provide liquidity to our member institutions. So there's no pushback in relation to that. I would say that one of the things that we are very much focused on is our support for community investment related activities and ensuring that the advances that we provide to our member institutions.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Assets were agency marks backed securities and whole loan mortgages, but they were deposited from crypto companies. I mean, obviously crypto did not exist in 1932 when the federal home of was created, but do you think are you seeing more resistance to those sorts of activities? Because there is a little bit of pushback, at least in the public sphere.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Accordingly, but it all varies, and Dan pointed out the range is between 4% and 9% in general across the federal home loan bank system. If you think about where mortgage rates are currently, mortgage rates are around 7% or so. So the dividend related to the The activities in which our members engage in, it's comparable to a mortgage loan and also To Dan's points, it's an excellent point the stock, when Congress created the federal home loan banks back in 1932, they said the stock would be valued at par value at $100 per share and the stock today is still worth $100 per share.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Institution should be holding. That becomes their member activity. To the extent that members borrow beyond the member activity stock level, that's when they would have to purchase activity stock. These would vary. In general, that's the general premise. Each bank would have a different type of a capital plan. So you'd have to see the nuances between the individual banks. From a Chicago bank perspective, we look at the activity stock, the members that engage with the federal home loan bank because we're here to support our member institutions. We want to ensure that the activity that they do with the bank, they have a higher dividend associated with the activity for just membership stock, the dividend rate would be lower.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, if you want to look at the capital structure, the capital stock structure of each of the individual federal unloan banks, I would say each one of us have our own separate capital plan that we've gotten approved by our member institutions. And so typically you have a member stock component and you have an activity stock component. And so, and I'll speak in relation to Chicago, for example, members when they joined the federal home loan bank, as they joined the cooperative, they have to purchase membership stock. And that's going to be for Chicago based upon the level of mortgage-related assets that they hold on their balance sheet. And we compute that on an annual basis. There is a recalculation. All the federal home loan banks have to do an annual recalculation of how much capital stock”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, it's public. It's actually submitted in all the quarterly returns. The banks are different. They vary a little bit. A low dividend would be 4%. That's really low these days, right? A high dividend might be 7%, 8%, 9%. That's reasonable and tight in terms of this type of capital, I think. And then some banks pay slightly different dividend rates for members who have paid in their capital are members but aren't active. They don't actually take a lot of advances and others that do take advances is kind of a fairness thing in a way. So it varies, but it ranges. And Michael can comment on that. But the dividends are actually considered steady, stable, and quite market-driven, quite fair, in my experience.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Affordable housing allocations will go way down because the system would be a lot smaller, the profits would be a lot smaller. In addition, you also create the co-op opportunity, which is you are able to support these smaller and mid-sized banks that just wouldn't have a system or enough capital flowing around to be supported. So the dividends get paid out and they're very transparent. You know, there's profits. You don't pay out. We can't borrow to pay out dividends. None of the crazy stuff that you see in publicly traded companies. And again, speaking for San Francisco, there's guidance between a range. It's actually quite reasonable because here's the final point. It's a little technical. They can't ever get an appreciation on the stock value because it is by law and by our own rules, you know, paid in at par and bought out at par. In other words, if it's a dollar, in 25 years, you're going to get a dollar. And so the only flow from that.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Bigger. So if you look at proportions, they're under their practical proportions. But because we're self-capitalizing, if you're going to post that collateral, you're going to take an advance and it's medium to big, you're going to buy in a bunch more stock. That's why they have that, right? But what protects everybody else is this hard and fast rule that everyone has to be given the same reasonable treatment. What I mean by that is if you're a strong regional bank and you're one hundredth the size of B of A, but you're strong and your collateral is great, you're going to get the same terms, right? Now, if you're a tiny little bank and you haven't been around long, you might get different terms, but they're going to be treated fairly deeply. So here's the secret. These big banks, they provide a lot of activity for the federal home loan banks. They're obviously low risk. That revenue, that profit flows into the system. A big chunk of that goes to affordable housing. If you got rid of all the big banks,”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Just an asset size issue, and that's a great question because if you're going to say, hey, could this be gained? Like, could someone abuse this? What would go wrong? One of the things you would want to absolutely be sure you did is create a law that says every member of the co-op has to be equally and fairly treated in light of standard observed common practices. And that's actually the law. And then there's a bunch of regulations around that. And then the regulator pays a lot of attention to that. What you're seeing, though, and I'll tell you the huge advantage of the federal home loan bank system for this and the Wealth Fargo's and the JP Morgan and the BFAs, I hope they forgive me for saying this. And I mean it in a genuinely positive way. So what you're seeing is the relative huge capital size, right? The GSIP problem is a separate own problem. We are fighting the good fight because we help support local and regional banks. But they are very, very big. And so their asset availability, their collateral available to pledge, they're being treated equally as all the small players. It's just that there's so much.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“And you can look this up directly in our filings. That capital reserve is, in essence, the last line of defense against all the other things that we describe where we have tremendous capital buffer. So the self-capitalizing is specifically members put in more capital when they get advances, but that capital is coming from a lot of places. And again, back to the nature of a private co-op as opposed to a publicly traded company that has a stock price that goes up and down and your executives make more because they have capital if the stock price source, we don't have any of that. Our cooperative members want us to pay an appropriate dividend, but they want us to have plenty of capital because they want to be able to show up and access the advances. It is a very elegant balance system. The problem, therefore, is difficult to explain in less than a couple hours, which just doesn't sell in the market.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so a couple things. So, first, he's referencing kind of self capitalizing, which is to say the member institutions, when they do increase their advances, have to put up more ownership stock at par value. So it ensures kind of a consistency of incentives and it does provide capital to the federal home loan bank itself. It is worth noting that the federal home loan banks also build capital in a lot of other ways for the San Francisco Bank, for example. We have very substantial retained earnings. It was the only thing that almost prompted me to email Catherine Judge, who was at Stanford Law School while I was teaching. And I said, wait, you used a phrase that essentially said, hoarding capital. You can't say there's risk to the system and these folks have a lot of capital, right? So capital solves so many things. So they have lots of ways to build up capital. But to your point, then when advances occur, we have as a regulated entity, the federal home loan banks, you know, capital ratio requirements.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Anyone has effectively come up with something that can provide this liquidity, support a small and regional banks, and provide this support to the housing finance universe of the United States, all while drawing a subsidy from global lenders, which I love, right? So it's kind of the one free lunch in the American people's taxpayer pocket. So that's often my big question is like, what would you do differently? And there's a lot of little things to do for sure. Beyond that, I don't know.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“And support for housing, and we didn't get a chance to talk a lot about that, but the housing is direct and indirect. If you support the mortgage market directly and indirectly, you improve financing availability in that Wisconsin paper shows it drives down borrowing costs. On the other hand, directly funding innovative programs for down payment assistance and for overall affordable housing and for the building of affordable housing, you actually make a dent in what is a terrible environment right now for affordable housing. And that's always my question to people who kind of say, gosh, federal homeland bank been around a long time. You know, should we get rid of them? Should we make them a lot smaller? And I tend to say, if you can find me a system that doesn't put the tab at the foot of the taxpayer directly and still has kind of market discipline involved in it, I'm all yours, right? Like the federal home loan bank has hardly perfect, but I don't think.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“If you take a lens out on that a little bit, I think, and Jack, you speak to more financial players of a wider variety than anybody I know. So there's almost a check against your intuition on this. I don't think there's any other sizable player in the marketplace that's engaged in simultaneously drawing capital from the global markets, engaging its sophisticated hedging to de-risk the internal loan of that capital to financial players, where everyone's interests are kind of lined up, right? It's private capital, there's members of that co-op, you know, there's not tens of thousands, there's hundreds, sometimes a thousand if they're a lot of small banks, and essentially providing this liquidity function that's market priced and driven and relatively speaking, you know, derisked. There's just no other substitute for that. And the Federal Homeland Bank is so unusually unique in that sense, right? And in turn, it means you get the support for small banks, for regional banks.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“This is a way in which we manage the interest rate risk associated with the portfolio of assets that we would have. So it's a dynamic way in which we manage our balance sheet and ensure that we are operating in a safe and sound manner. So when you think about some of the risks that we have to manage, that's a way in which we're managing our market risk exposure.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“To hedge what we would have is our own mortgage portfolio. And so we, as federal home loan banks, we participate in various mortgage programs. So the federal home loan bank of Chicago has the mortgage partnership finance program where we purchase mortgage loans that are member institutions originate. We will hold those loans on our balance sheet and in turn pay our member institutions the credit risk as we share in the credit risk associated with those loans we would pay them a credit enhancement fee so our members would earn a credit enhancement for the loans that they were originate and that we hold on our balance sheet and we would hedge that debt or hedge the mortgage loans with callable debt so the mortgage loans prepay we would be able to call that debt accordingly but”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so the federal home loan banks will use callable debt in various ways as far as our own debt issuance, what we do is transform what demand may be in the marketplace for our debt and translate that back into funding to our member institutions. So in general, if we were issuing called debt, we will swap the callable debt accordingly. So just convert the callable debt into a floating rate sofa one month, three months sofa related instrument. And that funding we would pass along that funding to our members and the advances that we would issue. So that's one form in which we do that. So transforming what the investor demand is in the marketplace to meet the member demand. The other is we'll issue callable debt.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“A lot of the federal home loan banks rely on callable debt. So they issue debt that if interest rates go down, the federal home loans bank can refinance. Michael, could you speak to that as a role in federal home loan banks managing their own interest rate risk”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“In general, a run up in interest rates this high that certainly caught a lot of people off guard. But I think that right now what we are seeing with our member institutions, depository institutions, deposit outflows have started to certainly have stabilized the loan demand has started to come down. So there is a normalizing effect that you would expect to see in this type of a cycle. So hopefully as we go forward, the liquidity issues and liquidity challenges, I think that has calmed down quite a bit.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Well, I can't speak to the Silicon Valley Bank failure or First Republic or what have you. But in general, I think that by and large, the majority of financial institutions that are members of the federal home loan banks Have managed through this process very well. I do know that there are certainly more stress within the regional banks across the United States. And I think things are starting to stabilize from where we had been in March.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, well, having looked a little bit through various federal home loan bank balance sheets and what they have, I see what you mean about those hedges. Is it surprising to you as it has been to the general investing public the degree to which so many banks, or I should say a few banks were so caught so off guard by the rise in interest rates, 525 basis point increase that the federal home loan bank hedges, a lot of real estate firms hedges, but some banks like Silicon Valley Bank basically had effectively no hedges at all and there are other examples of that was that a surprise to you to Michael and how big of a problem do you think this is going forward?”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Mean is that in the case of resolving something, if you have the advances sitting there and there's plenty of collateral, but you want to pay them off, if you pay them off early, there's going to be an extra prepayment penalty associated with that. But this would be the case in almost any market transaction. And that penalty isn't some sort of like grab at money. It is literally the unwinding of all of these hedging and other derivative instruments that were designed to make that whole process less risky.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“But they still have risk. One of the things we do behind the scenes is we hedge out any of the risk we can related to duration. We're going to the bond market. We're getting capital. We're lending it to our own members. And so we make sure that we've minimized any of the risk with duration mismatches and other typical finance functions. And that uses up a lot of capital. It's why we're not a hedge fund. Like there's no profit. We're using up all that profit to de-risk things. If you need to prepay in advance, then there is oftentimes a prepayment penalty, which is really just the cost of unwinding all of those hedges, right? And so that, I think, this, it's just my personal theory, not the view of the bank, is that when the FDIC says, oh, the federal home loan bank system costs us money. What they might mean, because there's no evidence that the other thing you described ever.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, but to your point, I think there is no record ever of the federal home loan bank in a resolution situation somehow drawing from other creditors' assets to satisfy its advances. I actually don't think that story exists before we hopped on the phone. I got on the phone to make sure nothing had changed and make sure that was true. And again, I think what you might be referring to, and it's worth clarifying, so first, the collateral, just like any, we have absolute priority in the collateral that we have as our security. Full stop, but anyone could have that for their own collateral if they did what we did. So that's important to know. But the part where maybe people say, oh, it costs more is there's a, and this speaks to the risk diminishing role of the federal home loan banks. If we were taking those risks that you mentioned when people say, oh, we're secure, we do this.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Right. And Dan, that argument that you just laid out did make sense. So the argument that it does cost money, I'll just say for the audience who might not know what we're talking about, is that because, sorry, Michael, I know what is called the super lean is so robust that when a bank fails and the FDIC has to claim that the federal home loan bank is a very senior creditor and the amount that is paid to the federal home loan bank, that equates to the losses of the FDIC. And Sudan, you made an argument that makes sense to me. I would just say that though, you know, it's not just people, the FDIC of people who leave the office say things that are different. For example, Federal Reserve chairs and governors. Now, when they're in office, they never even say that they are, quote, monetizing the US debt, but sometimes when they leave, they can get a little more.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, with that being said, we are working closely with our members' primary regulators. In this case, as an example, the FDIC, so that there isn't this distress sale, there is an orderly sale of the member institution so that there's not this distress in collateral or that it would put a stress on the deposit insurance fund.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Then you have a fire sale of assets. You can't find buyers. You get like that's a much harder story. And arguably, you get less for what you have in an institution that's either being wound up or has failed or needs to be sold. And we play one part of that. There's other liquidity providers. But if we play a role in that, we help save them money, if anything. But we certainly don't cost the FDIC money.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Things that come out. And my one observation would be only ask current FDIC officials that question and you will get a very specific answer, right? And we've got some good examples, congressional testimonies and the like recently where FDIC chairman Grumberg, when he was testifying most recently, said very explicitly, he's like, well, I'm paraphrasing, you know, thank goodness for the federal home loan bank system, right? They provide liquidity while members endure or work out situations. Their members rely on them for advances to strengthen their liquidity position. And we should destigmatize that. He was also referring to the Fed and he spoke very positively about the role. And I think that's a big part of it, even in the most dramatic part of the last six months where you want to say what cost the FDIC money, lack of time. If the FDIC doesn't have time at all to resolve something,”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Which is the law is what requires us to get a perfected security interest. Now, when people say we have a security interest, sometimes they mean they have claim to some asset, sometimes they mean they have a promise that they'll get the claim. But when we say perfected security interest, we validated the collateral. We priced it, we provide our own haircuts, and then we do a UCC filing, and we also possess it at a certain moment in time under certain circumstances. That perfected security interest any lender could engage in that level of effort and work. Many don't, right? But that's the lean. Like that's a, if you have a perfected security interest, you're going to get access to that collateral if everything goes south. That's at the heart of our stability. And as a corollary, therefore, we do not cost the FDIC extra money. And I know it's one of the most”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“We don't have a profit incentive, right? So, all that we have is the cooperative incentive. And certainly, you know, our members who have to put capital in and every time they get in advance, they have to put more capital in. That's what we mean by self-capitalizing. They have a strong interest in making sure, A, we run well so their capital isn't lost if something went wrong. And secondly, the returns on all of this activity. So a portion goes to affordable housing. A portion goes to building up more capital reserves. And then there's a dividend opportunity, right? But if you have a grouping of 100 or 200 or 500 sophisticated financial institutions or cooperative members, that is one of the strongest self-regulating structures you could provide because they're going to be asking hard questions. They don't want to put at risk any of their capital. So it's so different from most other systems. And I do want to go back to this idea of the super lean. Just say one more time because Michael explained it perfectly and maybe I should be glib and explain it in short.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“We don't want to create risk that would be a problem within the federal home loan bank system because one of the biggest values that we have or one of the biggest assets is our ability to access the debt markets. And that's very important because it's critical that we meet the member liquidity needs in the marketplace, both calm times as well as in stressful times. So we need to ensure that we are protecting our member shareholders in relation to that. And so the last thing that we would do is take delivery or possession of that collateral, certainly for a security collateral, we do take possession and it's delivered through two custodians. But all of that provides the Losses on the advances that our members take from the federal home loan banks.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Operate no differently. We maybe operate at a different scale, but we operate no differently than any other secured lender. That protects the federal home loan banks itself. In addition to that, we go through a robust process, each one of us, in marking to market the loan collateral that members pledge to us, and ensuring that we are providing a value associated with that collateral so that we're not taking undue risk in relation to what they're providing to us. In addition, we look at haircuts that we would apply so that if we had to liquidate the collateral, we would be made whole because it's important that we are protecting the cooperative as a whole. And as Dan talked about being jointly and severally liable, we want to ensure that our shareholders, member shareholders, are protected against any sort of loss. We're not taking undue risk.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“And I wouldn't define it as the super lean. I would look at it as what are the requirements that we are supposed to have in place. And we are a secured lender. And so the first thing that we have to do in order for our members to pledge collateral to the federal home bank, if they're pledging mortgage loan collateral, home equity loans, commercial real estate, we have to file UCC filings to ensure that we are the primary secured party associated with that low collateral. So we are first priority, first lean priority in relation to that. That is no different than any other secured lender that is in the marketplace. And so another institution wanted to be the lend to another party. They would secure their interest in that loan collateral.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I would say that our business model is vastly different than Fanny and Freddie. And certainly what Dan had laid out are self-capitalizing model itself affords us a lot of protection. The fact that we are secured lenders to our member institutions provide us a lot of protection. And the whole design of that is, and we are unique in how we're designed by Congress. We have a very strong regulator. We have operate with a significant amount of regulations and oversight in order to ensure that we are managing the credit risk, market risk, operational risk appropriately. And so the amount of risk taking that we can actually take on relative to Fannie and Freddie vastly different. And so if you overlay all of those protections,”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Is private capital completely, it's a co op, which makes people responsible, it's got a stronger regulator now who's learned a lot of lessons, not all of them applied, but learned a lot of lessons. And now you have this function that the global market bond market would signal if the mission of the Federal Home Lumbank or its creditworthiness were at all awry. You would see movements that don't correlate with the overall available credit globally. And you don't. I mean, it's big enough that you can do a lot of empirical work and kind of look at it and discern all of that.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“The SRA cost for Fanny and Freddie were quite high, actually, right? So you could go in the hedge fund market and get someone to guarantee it and say, what would you price it at? That's the way to get the proxy, right? So that, you're absolutely right. Like there's got to be some price that someone would pay for insurance, right? That doesn't exist in this story. But if you could do that, what would be that price? That's the real price you should be identifying, right? Same way that the cost of your insurance for your house is not the replacement cost of your home. It's what you pay. for it, right? There's somebody is absorbing that. And so I think that's the right way to do it. And Fami and Freddie, again, it's important to distinguish they were GSEs, but they were publicly traded companies, right? There was that public stock issue. They had comp that was allowed to be anything for their executives. There was just a lot of stuff going on there and they weren't jointly and severally liable. And the features of the federal home loan bank system, which predate all of that, right, are so much stronger.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“That makes sense. I think setting aside that the tax benefit and then affordable housing, I think the cost of a government bailout so far has would be zero because there have been zero losses to the federal home banks and zero bailout of bond issuances. Like I'd say the cost of the Fannie Mae implied guarantee was zero in 2007 until it became 200 billion. Now federal home loan bank was doing a lot of stuff that to my knowledge I don't think you're doing.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“It's kind of like paying for fire insurance if you had a metal house in the middle of the desert with nothing burnable around it. You could buy fire insurance, and it'd probably be wise to do so, nonetheless, but it's going to be fantastic. Enterprise. That's why you don't want to make it formal. Why bother? You're getting all the benefit you want. Why tie the hands of government, even in the tiniest possibility? Why do you need to tie the hands of government? You don't.”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“Investors. That's correct. So investors are getting slightly lower yield. But is there some sort of cost? There's no free lunch. And the answer is there is some modest actuarial cost. You have to estimate kind of like an insurance payment, you know, what is the risk of some sort of catastrophic failure and then after that failure, the government makes good on its implied guarantee. Like you follow that string all the way down, you say, what is that appropriate actuarial cost? And as it happens, the GAO did that kind of work in the 90s to figure out if they were going to expand the Brady bill. So they have a whole methodology of doing it. And if you looked at it and you read the right papers all the way down, you realized that that cost is not borne by the taxpayers in nearly the amount of the subsidy. In fact, it's probably somewhere between $10 and $100 million a year because the federal home loan bank system has so many layers of protection that the probability of a bond default is so very, very”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT
“But here is my number one goal for you, Jack, and for everyone who listens to this podcast to walk away with is the correct math for what that subsidy is. So if in fact the federal home loan bank system has bonds it offers and it gets them a little bit cheaper who's paying for that subsidy?”
2023-08-18 · Forward Guidance · The Banking System's Guardian Angel You've Never Heard Of | Michael Ericson & Dan Siciliano on Federal Home Loan Banks · IDENTIFIED FROM THE TRANSCRIPT