Home Loan Banks' Regulator Drops Plan for Preferred Stock

WASHINGTON -- The Federal Housing Finance Board has scrapped a key element of its plan to convert the Federal Home Loan Bank System to all-voluntary membership by 1995.

The proposal abandoned was to create a category of preferred stock in the 12 Federal Home Loan banks, which the board regulates. The idea encountered intense opposition from thrifts.

In a memorandum circulated to Home Loan bank directors last month, the Finance Board proposed to let thrifts drop their now-mandatory membership in the Home Loan Bank System. That would put them on the same voluntary footing as the 396 commercial banks and credit unions that have signed up since 1989 as participants in the mortgage liquidity system.

A Balancing Act

The Finance Board hopes that loosening the membership rules for thrifts will bring political support for a reduction in membership costs and borrowing costs for commercial banks. Increased bank membership is seen as crucial to the bank system's survival.

Thrifts' investments in the Home Loan banks would have been redeemable in the form of preferred stock, not cash. The Home Loan banks had $10.5 billion of capital stock at the end of August.

The Finance Board is under pressure from the Treasury Department to limit the amount of capital that flows out of the bank system. Under the 1989 thrift bailout law, the Home Loan banks must contribute $300 million a year to the cleanup; the Treasury is adamant that those contributions continue.

The Finance Board hit on the idea of issuing preferred stock as a way of keeping at least $5 billion of capital in the bank system, no matter how many thrifts leave.

To coax departing thrifts to accept the preferred stock, the Finance Board would have guaranteed the yields on the stock and let it be traded.

But for thrifts that want to stay in the system, the proposal raised serious problems.

The new class of stock might have gobbled up earnings that now flow to common stockholders of the Home Loan banks. That could have triggered accountants to review -- and possibly write down -- the value of the common stock. And rating agencies might have reconsidered the Home Loan banks' triple-A credit rating.

"Nobody wants to take the chance of undermining our common stock," a Finance Board official said. The agency is developing other options in consultation with its members and the Bush administration, the official added.

The stock value matters to thrifts because Home Loan bank common stock makes up about 30% of the industry's capital and earnings.

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