Government Banks Are A Massive Scandal

The Federal Home Loan Bank of Seattle is proving that besides creating a bubble, the government banks are politically appointed, scandal ridden, money losers to boot. "Fresh from eight years as mayor of Seattle, Rice had plenty of people skills but little banking experience. His background probably would have sufficed if the home-loan bank had stuck to its traditional business. Instead, it waded into the far riskier business of buying mortgages from banks, setting itself up as a pint-sized competitor to Fannie Mae and Freddie Mac."

"The home-loan banks can borrow at low rates from the global bond markets. They lend the money at higher rates to their members, a simple business that brings in steady profits."

Yet there are multi-billion dollar losses at the largest players? Those flat rates that amazed everyone in 2004 were a disaster to firms like Fannie Mae, which had bet on an increase.

"'It's a business that to an outsider looks extraordinarily simple, but managing the interest-rate risk associated with mortgage assets is in fact very complex and difficult,' Roy Whitehead said. Other companies also were caught by interest rates staying low for so long. Last year, Washington Mutual's flawed assumptions about interest rates hurt its profits."

This story reveals that there is no failure in government that will go unrewarded. "Specific responsibility for the decisions that sank the bank's mortgage program remains unclear. Rice retired in March, and Chief Financial Officer Kelli Bono, a longtime employee of the bank, resigned with a generous severance package, according to people familiar with the situation."