ABA Calls on Treasury, Bank Regulators to Rectify Unintended Consequences of Freddie, Fannie Bailout

The American Bankers Association called on the Treasury Department and bank regulators today to adopt a quick and comprehensive approach to rectifying the unintended consequences of the bailout of the government sponsored enterprises that caused unexpected losses to banks holding preferred stock.

ABA said action is needed because banks suffering losses from GSE preferred shares may experience a reduction in their capital classification, exposing them to potential increases in deposit insurance premiums and undermining sources of liquidity.

"It now is clear that the conservatorship program for Fannie Mae and Freddie Mac is having a significantly greater negative impact on portions of the banking industry than first estimated by policy makers and regulators," said ABA Chairman Bradley E. Rock and ABA President and CEO Edward L. Yingling in letters to Treasury Secretary Henry Paulson and the heads of the four bank regulatory agencies. Rock is also is also chairman and CEO of Bank of Smithtown in Smithtown, N.Y.

"It is imperative that this impact be addressed both quickly and in a comprehensive fashion to mitigate the unintended consequences. Anything less could harm otherwise fundamentally sound institutions that are already working overtime to serve their customers and communities in this difficult economic environment."

ABA recommended a six-point comprehensive course of action:

• At least a portion of preferred share dividends should be restored, which would restore a similar portion of share value and reduce impairment charges,
• Reductions in preferred stock dividends should be delayed until Congress and the regulators can assess the implications and address solutions.
• Losses for tax purposes should be treated as ordinary income so they can offset a bank’s ordinary income. 
• Capital risk-weights for GSE debt and GSE-mortgage backed securities should be reduced from the current 20 percent weighting. 
• The risk weighting for auction rate preferred securities should be applied consistently at 20 percent. 
• The banking agencies should increase the flexibility of capital restoration plans for banks, where necessary.

The American Bankers Association brings together banks of all sizes and charters into one association. ABA works to enhance the competitiveness of the nation’s banking industry and strengthen America’s economy and communities. Its members – the majority of which are banks with less than $125 million in assets – represent over 95 percent of the industry’s $12.7 trillion in assets and employ over 2 million men and women.