FHLB Reports Deep FinancialHole

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SEATTLE - (05/18/05) -- The Federal Home Loan Bank ofSeattle, which has been working to resolve an insider tradingcontroversy, said yesterday that it is sitting on $261 million inunrealized losses in interest-rate swaps in its hedging portfolio,the result of continued low mortgage rates. The unrealized losseswere caused by massive prepayments in the FHLB's secondary mortgageprogram which caused rate compression between assets andliabilities, the regional FHLB said. Net income for the SeattleBank plunged to just $17.5 million for the fourth quarter and byalmost half for the year to $82.3 million, cutting the bank'scapital by 14% to $2.1 billion. Still, bank executives said theyexpect a supervisory agreement they struck with their regulator,the Federal Housing Finance Board, which will require them to exitthe secondary market program and cutback on, maybe even eliminate,dividends for the next three years, will put them on sound footing.The bank announced last week that two directors had resigned formthe board after an internal investigation discovered their bankshad sold $74 million in stock in the bank while news of thedeclining financials was pending but had yet to be disclosedpublicly. The bank is owned by 374 financial institutions,including 79 credit unions.

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