FHLB Conducts Probe Into Insider Trading

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The Federal Home Loan Bank of Seattle said last week it is investigating whether three of its member institutions had information about the bank's troubled finances when they requested redemptions of $330 million in stock last fall, right before the dividend was cut and future redemptions were restricted.

All three of the institutions in question, which had their stock redeemed at par, or $100 per share, had representatives on the bank's board of directors.

Recently, the Seattle bank, which faces unrealized losses of $260 million on its investment portfolio, predicted it would pay minimal or no dividends on its stock while it implements a new plan.

While Federal Home Loan Bank stock is not subject to market run-ups or downs based on adverse public disclosures, the necessity to move millions of dollars into its capital account could diminish the par value of the stock in the future.

According to a report issued by the Federal Home Loan Bank of Seattle, one of its other members has requested that the transactions be reversed because the three member/directors possessed material nonpublic information about the bank's finances.

The Seattle bank is owned by its 375 financial institution members-including 79 credit unions-in Alaska, Idaho, Montana, Oregon, Utah, Washington, Wyoming, Guam and Hawaii.

The financial troubles and controversy at the Seattle bank come at a bad time for the 12 FHLBs, as Congress is discussing a new regulatory scheme for the system as part of reform of the oversight for Fannie Mae and Freddie Mac.

This will only add to the belief that tighter controls over the FHLBs should be part of any such plans.

Because of the important role Fannie Mae, Freddie Mac and the FHLBs play for many credit unions, the credit union lobby is closely monitoring the progress of these congressional discussions.

At least two other Federal Home Loan Banks are said to be watching the financial troubles at the Seattle bank in hopes that the bank will be dissolved and that the assets will be awarded to neighboring FHLBs, according to several sources.

One source said the FHLB of San Francisco is the likely recipient of some of the Seattle bank's assets if the trouble institution is dissolved.

There is a distant precedent for the dissolution of a Federal Home Loan Bank as financial difficulties forced regulators to liquidate the Federal Home Loan Bank of Los Angeles in 1945, which, ironically, led to the creation of the Seattle bank.

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