The U.S. taxpayers found out the hard way the cost of their “implicit” guaranty of Fannie Mae and Freddie Mac debt. Even after paying $191 billion, taxpayers are still on the hook for these government-sponsored enterprises (GSE). But the final chapter has yet to be written.

Another GSE, the Federal Home Loan Bank System, is flying under the radar propped up by the same implicit taxpayer guaranty. Like Fannie and Freddie, it issues debt at a discount due to the perception that taxpayers will make good on it. But unlike Fannie and Freddie, this GSE competes for its funding with the same taxpayers that underpin it.

The Federal Home Loan Bank of the United States, let’s call it “Bank U.S.,” is in dire straits. The fictional Bank U.S. is based on the consolidation of each of the 11 existing Federal Home Loan Banks. This makes sense because the GSE issues consolidated debt on behalf of all FHLBanks, plus all the banks are jointly and severally liable for the obligations of their sister banks.

If Bank U.S. were a commercial bank its total assets of $723 billion would rank it #5 just behind Citigroup.

Have you ever wondered why Bank A pays 0.75 percent on its savings accounts while Bank B pays 0.50 percent? You probably thought it was because of competition. That is partly true. However, in the funding market, Bank U.S. competes with both banks and with you every day. Bank U.S., you may be surprised to learn, is your bank. And, unlike you, Bank U.S. pays no federal income taxes.

In 2020, according to my calculations of SEC filings, the 11 Bank U.S. CEOs gained over $39 million in total compensation for overseeing what are essentially quasi-governmental agencies. As a practical matter, they cannot fail. Bank U.S. offers just one product: secured loans on favorable terms to member financial institutions. They have no dissident or activist shareholders to worry about and are immune from unwanted takeovers. Their innovation is restricted by law and regulation. Their geographic and customer market is fixed by statute.

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