What Are the Federal Home Loan Banks Up To? Emerging Views of Purpose among Institutional Leadership

In the summer of 1998, Business Week presented its readers with a quiz: "Name a lender with more assets than Citicorp and a loan book growing 25% a year. A whirling dervish in the capital markets, this outfit can sell scores of bond issues in a day, and it deals in so much overnight paper that its debt issuance has exceeded the U.S. Treasury (Silverman 1998)." Give up? The answer is the low-profile Federal Home Loan Bank System--a government-sponsored enterprise created during the Depression to support home ownership by lending to savings and loan associations. Taking its cue from a highly critical July 27, 1998 letter from then-Treasury Secretary Robert Rubin to Senate Banking Committee Chair Alphonse D'Amato, the influential business magazine went on to criticize the Federal Home Loan Banks (FHLBs) severely. Are they still needed under new economic conditions--with capital markets awash in liquidity and a highly developed secondary market for home mortgages? Do the increasingly profitable commercial banks that are now their members need the subsidy they provide, or even use it to finance housing? Or have the FHLBs run amok, using their special government-sponsored-enterprise status to raise cheap money for themselves and arbitrage it? Business Week's conclusion that the system today "has little social purpose" is not one to draw lightly. Collectively, the Federal Home Loan Banks are a major player in financial intermediation in the United States; their liquidation would have far-reaching consequences for banks, securities markets, communities, and individual home buyers. As part of a larger research project that aims to contribute to the debate over the role of the Federal Home Loan Banks in the political economy, this article focuses on the question of how leaders within the FHLBs view their institutions' purposes in light of legislative changes to their mandates in 1989 and 1999, and considers the implications of those views for the FHLBs' behavior and governance structures. Why should scholars of public administration be interested in Federal Home Loan Banks? There is growing recognition in the field that government relies not only on traditional public agencies to pursue its policy purposes, but also on an assortment of quasi-governmental entities, private nonprofit organizations, and private profit-seeking corporations (Kettl 1988; Light 1999). The hybrid public-private Federal Home Loan Banks were chartered by Congress to achieve public purposes without public appropriations, and they are capitalized with private money to influence the structure of private organizations' balance sheets in directions that yield outcomes deemed socially desirable. With re-evaluation of both their purposes and structure on active legislative and regulatory agendas, the FHLBs virtually demand empirical attention from scholars of public administration. Background Before turning to Federal Home Loan Bank leaders' views of their institutions' purposes, we summarize the function and current condition of the Federal Home Loan Bank System, briefly review its origin, and identify its public mandates. Function and Condition of the FHL Bank System There are 12 Federal Home Loan Banks, each serving a district defined on the basis of state boundaries. FHLBs are owned by financial institutions--mostly commercial banks and savings and loans--headquartered in their districts; stockholders are called "members" because the Banks have some features of cooperatives. The Banks' central function is to raise money and lend it to their members. They raise money by issuing bonds called "consolidated obligations," and their loans to members are called "advances." Members use advances to manage liquidity and expand their loan portfolios. With total assets of more than $600 billion (FHLB System 2000, 28), the Federal Home Loan Bank System constitutes a formidable presence in financial markets in the United States, and increasingly it ventures into international capital markets as well. …