WASHINGTON - Wachovia Corp.'s planned purchase of Golden West Financial Corp. might hurt the business of two Federal Home Loan banks and help push the system toward consolidation, observers said Wednesday.
The merger would also remove a key advocate for the Home Loan Banks - Golden West co-founder Herbert Sandler - who has been vocal on a range of system issues and spearheaded a lawsuit a decade ago against the Federal Housing Finance Board.
Golden West's thrift, World Savings Bank, uses its two charters to belong to the Dallas and San Francisco Home Loan banks. World Savings is the largest borrower at the Dallas bank, holding $11.2 billion in advances, or 24% of the Home Loan bank's total. The thrift is the No. 3 customer at the San Francisco bank, with $27.7 billion in advances, or 17% of that bank's total.
If Wachovia chose to consolidate the Golden West charters into its own - as it has with previous acquisitions - eventually it would have to sever its relationships with the Dallas and San Francisco banks. Such a move could hurt the banks' businesses, which traditionally rely on offering advances to members to make most of their income.
The Federal Home Loan Bank System is "already struggling to find a profitable mission in the face of member consolidation, shrinking mortgage markets and regulatory pressure," Karen Shaw Petrou, the managing director of Federal Financial Analytics, wrote in a recent client letter about the merger.
The loss of a big member like World Savings would add pressure on the banks to "find new members, new businesses, or both," she said.
The Dallas bank declined to comment for this article but has acknowledged in recent filings with the Securities and Exchange Commission that industry consolidation could take a toll.
"One or more large members or large borrowers could withdraw their membership or decrease their business levels as a result of a consolidation with an institution that is not one of our members … which could lead to a significant decrease in our total assets and capital," the bank wrote in a April 14 filing.
"In the event we lose one or more large borrowers," the bank wrote, it could "compensate for the loss by lowering dividend rates, raising advances rates [and] attempting to reduce operating expenses."
Wachovia's decision may be particularly critical for the $65 billion-asset Dallas bank, which is still dealing with the loss of its previous top advance customer several years ago. In February 2001 Washington Mutual Inc. bought Bank United Corp. of Houston - which then accounted for 25% of the bank's advances - and dissolved Bank United's charter. (By law, a financial institution can belong only to the Home Loan Bank in the FHLB district where it has a charter.)
The Dallas bank has yet to take the full impact of the Bank United sale, because Wamu is allowed to unwind Bank United's advances as they come to term. As a result, Wamu is the Dallas bank's No. 2 customer, holding $7.5 billion in advances, or roughly 16% of its total.
Most observers said that if Wachovia dissolved Golden West's charter it would probably take the same tack, allowing the advances to come to term but not making new ones.
The San Francisco and Dallas banks have "a long time to get ready for this event," said Jaret Seiberg, a policy analyst with Stanford Washington Research Group.
The San Francisco bank could also take a hit from Golden West's departure. San Francisco is the largest of the Home Loan banks, with $223 billion in assets as of yearend. A spokeswoman for the San Francisco bank noted that Wachovia has not announced whether it would dissolve Golden West's charters, and so it is "uncertain at this time what impact the merger will have on the bank."
"We manage the bank to be able to expand and contract with the funding needs of our members," she said. "This business model in part reflects our recognition of the consolidation trends that have been prevalent among financial institutions for many years."
To be sure, Wachovia could decide to retain Golden West's charters, or it could dissolve them and begin doing business with the Atlanta bank, which serves North Carolina.
But Wachovia has not shown much interest in the Home Loan Bank System before and is not a member. (The Charlotte-based bank is still running off $2.5 billion in advances with the Atlanta Home Loan bank that stem from its merger with First Union Corp. in 2001).
Though Golden West uses advances as a key funding source for mortgage lending, some analysts said Wachovia might use other sources.
"Wachovia does not need the Home Loan banks for cheap money," said Christopher Whalen, an analyst at Lord, Whalen LLC's Institutional Risk Analytics. "They can go directly to the capital markets."
Mr. Whalen said maintaining Home Loan Bank ties could add regulatory and operational costs.
"Wachovia will redeem the Home Loan bank stock and [the Home Loan banks] will lose that business," Mr. Whalen said. "Slowly, the Home Loan banks are being pushed out of existence."
Some said that the merger should force the Home Loan banks to consider consolidation. By law, the 12 banks can reduce their number to eight.
"Low bank profitability and the regulator's constraints on new products have the banks facing major strategic challenges," said Ms. Petrou. Those pressures could have members of the Home Loan banks calling for consolidation, she said.
Others argued against consolidation, noting that the Home Loan banks' assets have grown 53% since the end of 2000, to $998 billion.
"It's very hard to imagine a merger [between Home Loan banks], because there is no way to pay a premium for Home Loan bank shares," said Alex Pollock, a former president of the Chicago Home Loan Bank and who is now a fellow at the American Enterprise Institute.
"Why would anyone be willing to be acquired? Management has no equity stake, so a merger is all downside and no upside," Mr. Pollock said.
Though the financial impact of the Golden West deal is be unclear, it could have political consequences, several observers said.
"Golden West was one of the most active of all the thrifts in the Home Loan Bank System," said Robert Litan, a senior fellow in economic studies at the Brookings Institution. "When there was a public policy issue that affected the Home Loan banks, Golden West was right there speaking out."
In the mid 1990s, World Savings was part of an unsuccessful lawsuit that tried to stop the Federal Housing Finance Board from allowing the Home Loan banks to engage in mortgage purchase programs. The thrift has also commented on most issues affecting the system.
"When Herb was on the board of the San Francisco bank, he did not just pass the time," said Allan Mendelowitz, a member of the Finance Board. "He was a talented, savvy finance person who was not just a supporter of the system but involved in protecting the safety and soundness of the system."
"The system has lost one if it's strongest voices in the private sector," Mr. Litan agreed. "It's not clear whether Wachovia will have those same interests."
