Accounting rule imperils Atlanta FHLB - Atlanta Business Chronicle:

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That’s the recent assessment of industry analysts who said losses at theAtlanta bank, and other Federal Home Loan Banks, will be drivemn by an accounting rule known as “other than temporary impairment,” whicg forces institutions to write-down the values of mortgage-backed securities. The possible write-downx could have a significant impact on Federap Home Loanbanks nationwide, according to a Moody’ Global Banking report authored by Briab Harris on Jan. 8. The Federal Home Loan Bank systek isthe nation’s largest borrower outside the federa government and has been one of the stalwart lenderd to banks during the ongoing financia crisis.
Atlanta’s bank is one of the largestt andmost profitable. Concerns that a main lendefr for Southeastern banks is ailing causedx Federal Home Loan Bank of Atlanta CEO Richard Dorfman to respondr publiclyon Jan. 9. “The Bank remains financially sound and is focuseed on executing its mission and providinvg members with access to the liquidity they need and he said in a letterto shareholders.
“Othe than temporary impairment” is like similar “mark-to-market” accounting rulesa that helped fuel the recent demis e of Wall Street investment banks and commercial It requires companiesto write-down the value of asset on its books, if the assets are declining in valuee and could be sold in the future, even if the securitiesa will be held to maturity. The lossess are not real economiclosses — a companyu will not experience the loss until the assets are sold but Federal Home Loan Banks are requirec to reserve capital against the write-downsz in value. In some cases, the write-downsw far exceed the expectedeconomicx losses.
The system is readily able to absorbv the economic losses ineach bank’s mortgage-backed securities portfolio, Moody’x report stated. But the system, including Atlanta, would not weather the accountingh rules treatment ofsuch losses. The Atlant a home loan bank reported in the thirdc quarter that itexpected $44,000 in lossesd from three mortgage-backed securities, which wouls start missing required payments to the bank in 2025. Yet the home loan bank had to reservs $87 million against those securitiews as it conformed to the impairmentaccountinvg rule. That charge, analysts could become far larger as theeconomuy worsens.
Atlanta’s home loan bank reported a $13 billion mortgage-backecd securities portfolio in third-quarter 2008. Moody’as report estimates that in a worst-casw scenario, eight of the nation’s 12 home loan including Atlanta, would be unable to absorb large write-downs of theire mortgage securities portfolios without depleting thei r capital belowmandated levels. And the Atlanta home loan bank has littlde room to weather lossese from theaccounting rule. It’s total capitapl is only 0.26 percenrt above a mandated 4 percent according tothe bank’s third-quarter report.
A dip beloew that 4 percent threshold would violatethe bank’s operatingv rules, potentially spurring more oversight and sanctions from the Federal Housing Finance the home loan banks’ overseer. Atlanta home loan bank spokesman Chri McEntee declined to state wherethe bank’s currenty capital levels are. He said the bank was with where itwas currently. “We’re beingv conservative and putting our primary mission which is providing liquidity to ourmember banks,” McEntee The bank has taken steps to preserve capital, like some sisterf institutions.
Since the third-quarter report and initial the Atlanta home loan bank announced it would beslashing fourth-quarter dividend payments to between 0 percentr and 1 percent. That figure is far below the 6 percenft dividend paid to shareholders at the beginningvof 2008, and will be less than half the 2.89 percenrt dividend paid at the end of the third quarter.