Look, Booboo, no crisis

Naked Capitalism makes a very good point about the (relative) lack of a catastrophe in the ABCP market recently:

Many mortgage-related ABCP issuers have gone to a lender of last resort, namely the Federal Home Loan Banks, which have extended $163 billion of loans to them.

(The FHLBs are commonly thought of as equivalent to U.S. government risk, although they do not have an explicit government guarantee.) NC then references a Bloomberg article, quoting

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs' Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.

[...]

The home loan banks ``were the only game in town for a lot of borrowers,'' said Jim Vogel, head of agency debt research at FTN Financial a securities firm in Memphis, Tennessee. They are ``like an old watch your grandfather left you years ago, and you pull it out of the drawer and find it's the only timepiece you have.''

This is really scary. The FHLBs are lightly regulated (laws tightening the regulatory framework around them are currently stalled in the Senate), were one of them to fail or come close to failure, there would be enormous pressure for a government bail-out, yet their risk management practices are hardly likely to be in the same category as a Goldman Sachs. Avoiding a market crisis this way may just be storing up trouble for the future. Gangway, gangway, I want to get off this particular boat.