Word out of both Citigroup Inc. (C: 30.87 +1.61%)  and Bank of America Corp. (BAC: 7.29 -0.14%) in recent weeks suggests an overall bleak outlook for fiscal 2008 and a shaky foothold going into 2009. Citigroup is expected to report massive fourth-quarter 2008 losses much greater than expected, but its lead independent director Richard Parsons said the bank's board stands behind CEO Vikram Pandit, according to a Wall Street Journal report Monday. "We have confidence in the current management and leadership of Vikram," Parsons told the Journal Sunday. He also denied recent rumors that Pandit may lose his job in light of the company recently losing Robert Rubin, according to the Journal.

BofA CEO Ken Lewis first hinted at his outlook on the bank when he recommended he and other top executives forgo bonuses for 2008. "Clearly, 2009 will be another challenging year,” Lewis said in an e-mail obtained by the Charlotte Observer and reported last week. The memo suggested Lewis expects 2008 performance numbers will fail to meet original projections. He said he expects BofA to continue to compete in the market "when economic conditions improve," according to the Observer.

Both banks have received money through the Treasury Department's Troubled Asset Relief Program. BofA on Oct. 28 received $15 billion through a stock purchase within the TARP's capital purchase program. Citigroup received $25 billion the same day through the CPP. Merrill Lynch & Co. Inc. — which was acquired by BofA — received $10 billion in the same fashion, although the dispense of those funds was deferred pending its merger with BofA, which completed Jan. 1 in a deal valued at $17.4 billion.

Then, months later, Citi received another $20 billion in TARP funds through a different program — the targeted investment program — which as of Dec. 31 had not granted or promised funds to any other financial institution, suggesting the program was formed solely to give Citi more bailout funds. The question remains — after more than two months of capital injections in these banks and consensus from both BofA and Citi officials that 2009 offers a bleak outlook — whether they will stay afloat on their own or require even more funding going forward.

Executive exodus
Citi's senior counselor Robert Rubin on Friday stepped down from his position. "My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today," Rubin said in his letter of resignation to Pandit. "Clearly, there is a great deal of work that needs to go into understanding exactly what led to this situation and what changes, regulatory and otherwise, must now be implemented to reduce systemic risk and protect consumers." Rubin will no longer be a part of those changes. His reasons were neutral: entering his 70s, he wishes to "reshape the structure of [his] life" and devote time to other pursuits.

Merrill Lynch also experienced an exodus of its executives as it faced the completion of its merger with purchaser BofA. On Thursday, Merrill experienced the latest in a handful of departures following the acquisition. The bank's investment banking chief Gregory Fleming announced he would leave for a teaching position at Yale University. Fleming was the latest of at least four executives — including Robert McCann's resignation three days earlier — to leave, according to an article by the New York Times.

“Merrill Lynch has been my professional home for the past 16 years, and I leave with mixed emotions,” Fleming said in a statement regarding his resignation, according to the Times. On Dec. 30, Merrill's vice chairman, Jeffrey Edwards, also resigned, saying he would leave in January to pursue other interests, according to a news bulletin by Bloomberg.

Write to Diana Golobay at diana.golobay@housingwire.com.

[Update 1 reflects statements released late Monday by the White House]

President-elect Barack Obama and his transition team are reportedly in discussions about how best to use the remaining $350 billion from the $700 billion bailout. The team is in negotiations with key lawmakers as of Monday to come to some kind of agreement and avoid political squabbling over the remaining Troubled Asset Relief Program (TARP) funds, according to a Wall Street Journal report. Of the funds' uses being discussed are foreclosure prevention and "tougher" conditions imposed on recipients of TARP funding. Obama's team mid-day Monday asked President George W. Bush for his approval in releasing the second half of the TARP funds, according to White House press secretary Dana Perino. With Bush's approval, the motion to release the funds could still be subject to Congressional disapproval.

Despite some vocal criticism in the past regarding a lack of transparency in the Treasury Department's implementation of TARP funds, several key lawmakers have rallied to go forward with the rest of the funding under revised program terms. They are led by House Financial Services Committee chairman Barney Frank, D-Mass., who on Friday released the outline of a bill that aims to amend the TARP by strengthening accountability, closing loopholes, increasing transparency and requiring the Treasury Department to “take significant steps on foreclosure mitigation," with $50 billion of the funds reserved specifically for that purpose. Such mitigation would have to include a systematic loan modification program, improvements to the Hope for Homeowners program to increase eligibility, and a home buyer's stimulus plan.

The same lack of transparency in the TARP issuance that led Frank to author his proposed legislation similarly led Obama to tell CNBC he wants to see the rest of the TARP money spent wisely, as well as increased oversight and transparency in the Treasury’s role in implementing those funds. He has told CNBC he plans to enforce job creation, increased spending, a fixed economy and reduced taxes when he takes office. It's still unclear whether any job creation will fall under the revamped TARP or Obama's forthcoming stimulus plan.

In a weekly address Saturday, he reiterated the job creation that will occur under his American Recovery and Reinvestment Plan which he said "will likely save or create three to four million jobs," by investing in clean energy and government infrastructure projects like repairing schools, roads and bridges. "The jobs we create will be in businesses large and small across a wide range of industries," Obama said. "And they’ll be the kind of jobs that don’t just put people to work in the short term, but position our economy to lead the world in the long-term."

Write to Diana Golobay at diana.golobay@housingwire.com.

(Update 1: corrected reference to Dallas FHLB; a spokesperson from the Home Loan bank said they will pay a reduced dividend to members, but are continuing to repurchase FHLB stock.)

Serious cracks are showing in the nation’s Federal Home Loan Bank system, and it now appears as if member banks are being forced to take at least some of the hit for it. Various banking industry sources suggested Friday afternoon that some Home Loan banks are squeezing the liquidity faucet, and refusing to pay banks back for FHLB stock they purchased.

When banks take loans from a Home Loan bank, besides paying interest, they also have to buy a percentage of FHLB-restricted and non-public stock, based on how much they borrowed and the credit quality of the collateral they posted. The system was set up as a way to basically help support the FHLBs' capital as banks borrow against it. When a member first signs on, the Home Loan bank sets up a clearing account that works like a check book; when member banks borrow money, the FHLB takes cash out of this account and in return gives the borrowing bank stock that pays a dividend. As a bank pays off the loan, the FHLB credits back their cash account by repurchasing the stock.

At least, that’s how it usually works. Now, reports are surfacing that suggest that the FHLBs themselves are running into their own problems, from owning billions in toxic mortgage bonds that are becoming worthless. Moody's Investors Service said in a report earlier this week that the Federal Home Loan Bank System's $76.2 billion private-label MBS portfolio contained $13.5 billion in unrealized losses at the end of Q3; values have likely fallen further since that time.

According to various banking sources who spoke on the condition of anonymity, at least four Home Loan banks have already notified members as early as mid-December that they will not pay dividends and will stop buying back the excess FHLB stock members hold. These banks included: Pittsburgh, Seattle, Des Moines and Boston. Decisions are made independently at each of the 12 Home Loan banks nationwide, but some analysts have suggested they expect more FHLBs to follow this move.

As a result, speculation is mounting that at least some of the Home Loan banks will fall below regulatory capital minimums. “If an FHLB Bank falls below its regulatory capital, it will not be permitted to pay dividends to shareholders; it will not be permitted to repurchase member stock; and it will be required to file with the agency a capital restoration plan," a spokeswoman from the Federal Housing Finance Agency, which regulates the FHLBs, said in an e-mailed response to questions.

A member of the Seattle FHLB who spoke on the condition of anonymity said, “They simply ran out of cash and are unable to repurchase stock right now. Until they get more capital, we don’t expect they can buy back the stock we hold.”

“This is disappointing,” said a Pennsylvania-based bank president, whose bank is a member of the Pittsburgh FHLB. “They are basically taking members’ money – money [member banks] expected would be safe because it’s federally-backed. I guess it proves the government can do whatever they want.”

Despite mounting concerns now being directed towards Federal Home Loan Banks, not all analysts see the problems facing the FHLB system as insurmountable. Analysts at RBS Greenwich Capital, in a research note Thursday, suggested “regardless of headline risk, we think that FHLB has strong funding power as well as ability to hold capital captive.” The FHLB has access to a Treasury line of credit, the analysts noted.

Nonetheless, at least one regional bank, Seattle-based Washington Federal (WFSL: 15.75 +1.48%), has already warned in a recent filing with the Securities and Exchange Commission that they might have to write off some or all of the FHLB stock they hold.

“The FHLBs have always had poor risk controls,” said Paul Miller, an analyst with Friedman Billings Ramsey Group Inc. “It’s a concern as a source of liquidity, especially for the smaller banks that really depend on the FHLB for advances. It won’t wipe them out, but it’s definitely one more difficult hurdle they have to jump through to get cash.”

According a report from the FHLB Finance Board, as of Sept. 30, 2008, four of the nation’s top banks hold $12.4 billion in FHLB stock. Citigroup Inc. (C: 30.87 +1.61%) holds $4.7 billion, followed by JP Morgan Chase & Co. (JPM: 37.21 -0.75%), which holds $4.1 billion; Bank of America Corp. (BAC: 7.29 -0.14%), via Countrywide, holds $2 billion, while Wells Fargo & Co. (WFC: 29.60 +1.89%), via Wachovia, now holds $1.6 billion in such stock.

JP Morgan, Bank of America, and Citi declined to comment on whether they intended to take a write down on the FHLB stock they hold in the next quarter; officials at Wells Fargo could not be reached for comment.

Editor's note: Teri Buhl is an investigative journalist covering Wall Street who writes for the New York Post Sunday Business.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

House Financial Services Committee chairman Barney Frank, D-Mass., on Friday released the outline of a bill that aims to amend the Troubled Asset Relief Program (TARP) by strengthening accountability, closing loopholes, increasing transparency and requiring the Treasury Department to "take significant steps on foreclosure mitigation." The outline seems to be Frank's response to mounting TARP criticism; it crossed the wire within moments of the Congressional Oversight Panel releasing biting criticism on the "significant gaps" in the Treasury's ability to track TARP funds injected into financial institutions.

The six sections of the outline include a modification of the TARP and its oversight, foreclosure relief, clarification of the automobile manufacturers' bailout, clarification of additional TARP uses, Hope for Homeowners (H4H) improvements and a home buyer stimulus. "It further requires that Treasury act promptly to permit the smaller community financial institutions that have been shut out so far to participate on the same terms as the large institutions that have already received funds," the outline reads, in part.

Under Frank's proposed makeover of the TARP, the second half of the $700 billion funds will be "conditioned on the use of a minimum of $50 billion for foreclosure mitigation." His language would require secretary Henry Paulson to develop a comprehensive plan to prevent and mitigate residential mortgage foreclosures by March 15, 2009. The required elements of the plan include a guarantee program for qualifying loan modifications under a systematic plan, bringing down the costs of Hope for Homeowner loans, "either through coverage of fees, purchasing H4H mortgages to ensure affordable rates, or both." The plan would also need to establish a program for loans to pay down second lien mortgages that are impeding a loan modification, grant servicer incentives and assistance to stimulate modifications, and include the purchase of whole loans for the purpose of modifying or refinancing them.

Included in the proposed Hope for Homeowners improvements are an elimination of the 3 percent upfront premium, an increased maximum loan to value ratio from 90 percent to 93 percent for borrowers with mortgage debt-to-income ratios over 31 percent. The government's profit-sharing of appreciation over market value of the home at the time of refinance would also be eliminated. Frank's outline also would require the Treasury to develop a program outside of TARP funding — instead using funding available through the Housing and Economic Recovery Act of 2008 — to "stimulate demand for home purchases and clear inventory of properties" by promoting more affordable mortgages through purchasing mortgages and mortgage-backed securities.

"In developing such program, Treasury shall provide mechanisms to ensure availability of such reduced rate loans through financial institutions that act as either originators or as portfolio lenders," the outline reads, in part. "Treasury shall make the affordable rates available under this program available in connection with Hope for Homeowner refinancing program."

Under the TARP modifications, Frank stipulated that the "Treasury shall require any existing or future institution that receives funding under TARP to provide no less than quarterly public reporting on its use of the funding." The Treasury must reach an agreement with the financial institution on how the funds are to be used, and then actively pursue an examination of the the institution's compliance with that agreement and with limits on executive compensation, to the extent that the Treasury may even have an observer at board and committee meetings of the institutions.

The outline of the proposed legislation calls for a clarification of the Treasury's authority to provide assistance to automaker financing arms and the automobile manufacturers themselves — which was something Paulson had repeated stated he would not do, as automakers fall outside of the nation's financial market and instead more closely fall into the nation's manufacturing sector. In the same vein, Frank would require a clarification of the Treasury's authority to intervene in other markets. The language in the outline specifies Treasury action to establish facilities that would support the availability of consumer loans — like student and auto loans — commercial real estate loans and support for issuers of municipal securities.

The full text of the proposed legislation was unavailable at the time this story was published. Read the outline.

Write to Diana Golobay at diana.golobay@housingwire.com.