FHLB Merger Talks May Stir Up Controversy
The Federal Home Loan Banks of Chicago and Dallas have started preliminary talks to assess "the benefits and feasibility" of combining their business operations into a yet-to-be-determined joint structure. Mirroring financial market trends, this first-of-its-kind effort in decades may pave the way to new developments within the FHLB system, if what skeptics see as an unlikely agreement succeeds.
President and CEO of the FHLB of Dallas, Terry Smith, and president and CEO of the FHLB of Chicago, Mike Thomas, noted in a joint press release that they are engaged in discussions which focus on "identifying whether and how a combination would produce advantageous results and improved value for members of both organizations and the affordable housing needs of their communities, while also supporting the ongoing strength of the Federal Home Loan Bank System."
It appears, however, there is no clear vision on what kind of joint operation could result from the talks.
Nancy Schachman, spokesperson for the FHLB of Chicago, told MSN it is too soon to comment.
"These are preliminary discussions, there's no structure, there's no plan, there's no agreement," she said. "We don't really know what the structure will be. No. I could say that our two banks initiated the conversations. It's really too soon to say what structure, if any, will result."
Both banks are cooperatives owned by member community development financial institutions in their FHLB districts with comparative assets (as of March 31, 2007) of $53.3 billion for the FHLB of Dallas and $87 billion for the FHLB of Chicago, representing over 900 and about 850 member institutions, respectively.
"If a combination provided an opportunity to enhance our financial performance in a way that's different from what we could do on a standalone, then that would be good. We really want to see whether it is beneficial in providing value to our members, since we are a cooperative, we're owned by our members."
Commenting on potential benefits, Kelly Sargent, spokesperson for the FHLB of Dallas, told MSN the joint entity would serve a larger number of states and combine resources "the same way any business combination will be, no matter who it is," especially in the affordable housing marketplace. Both entities are actively involved in affordable housing, which is part of their stated mission, so a joint operation possibly will create more such options, she said.
"It is essential to the mission of the home loan banks to help with homeownership, provide both direct and indirect financial support to affordable housing, and community investment projects," Ms. Schachman said. "It certainly is one of our highest priorities." The initiative aims to determine whether combined resources will best serve FHLB members, she said. "That's kind of where we are - trying to figure that out."
If successful, the effort may affect the wider FHLB marketplace.
If one dismisses a similar effort to merge the FHLBs in the 1940s, she said, "certainly there hasn't been anything done like this recently."
Timing for the discussions is not accidental. "There's a lot of consolidation in the financial services industry, everyone is looking for ways to lower their operating costs," she said. "We're looking for a way to be more effective."
If everything goes well during the negotiations, the banks will need regulatory approval. The Federal Housing Finance Board has regulatory power over the potential merger.
As of now it appears the FHLBs have not received any feedback on where FHFB stands regarding the deal.
"It's too soon to anticipate what their reaction will be to a transaction or structure that hasn't even been determined yet," Ms. Schachman said.
"Again, I want to emphasize these are just preliminary discussions, there's no plan, or agreement" and it is not a certain there will be a final arrangement.
It may be too early to tell but not so optimistic predictions already emerged. One attorney, who does contract work for the FHLBs and requested anonymity, told MSN the merger is "not likely" to happen.
"The war drums have been sounding in D.C. for several months now," he said. "The FHFB is upset that Chicago's subdebt financial turnaround plan has been failing, and has been looking for Chicago to come up with a way to get rid of their embedded losses.
Give some of them to the Dallas shareholders, I guess, is their plan."
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